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REGISTRATION NO. 333-30423
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GAYLORD CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2653 36-3472452
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
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500 LAKE COOK ROAD, SUITE 400
DEERFIELD, ILLINOIS 60015
TELEPHONE: (847) 405-5500
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
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DANIEL P. CASEY
500 LAKE COOK ROAD, SUITE 400
DEERFIELD, ILLINOIS 60015
TELEPHONE: (847) 405-5500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
WILLIAM S. KIRSCH
KIRKLAND & ELLIS
200 EAST RANDOLPH DRIVE
CHICAGO, ILLINOIS 60601
TELEPHONE: (312) 861-2288
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION DATED , 1997
PRELIMINARY PROSPECTUS
SEPTEMBER 8, 1997
GAYLORD CONTAINER CORPORATION
OFFER TO EXCHANGE ITS 9 3/4% SENIOR NOTES DUE 2007, SERIES B
FOR ANY AND ALL OF ITS OUTSTANDING 9 3/4% SENIOR NOTES DUE 2007, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER
8, 1997, UNLESS EXTENDED.
Gaylord Container Corporation, a Delaware corporation (the "Company") hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 9 3/4%
Senior Notes due 2007, Series B (the "Exchange Notes"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this prospectus is a part, for each $1,000
principal amount of its outstanding 9 3/4% Senior Notes due 2007, Series A (the
"Initial Notes"), of which $225,000,000 principal amount is outstanding. The
form and terms of the Exchange Notes are the same as the form and terms of the
Initial Notes except that (i) the Exchange Notes will bear a Series B
designation and a different CUSIP number, (ii) the issuance of the Exchange
Notes has been registered under the Securities Act and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (iii) holders
of the Exchange Notes will not be entitled to certain rights of holders of
Initial Notes under the Registration Rights Agreement (as defined). The Initial
Notes and the Exchange Notes are referred to herein collectively as the "Notes."
The Exchange Notes will evidence the same debt as the Initial Notes (which they
replace) and will be issued under and be entitled to the benefits of the
Indenture dated as of June 12, 1997 (the "Indenture") by and among the Company
and State Street Bank and Trust Company, as successor to Fleet National Bank, as
trustee, governing the Notes. See "The Exchange Offer" and "Description of
Exchange Notes."
The net proceeds of the Initial Note Offering (as defined) were used to
redeem (the "Redemption") all of the Company's 11 1/2% Senior Notes due 2001
(the "Old Notes") and to repay borrowings under the Company's revolving credit
facilities. The Initial Note Offering and the Redemption are collectively
referred to herein as the "Refinancing." See "The Refinancing."
The Company will accept for exchange any and all Initial Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time on October 8,
1997, unless extended by the Company in its sole discretion (the "Expiration
Date"). Tenders of Initial Notes may be withdrawn at any time prior to 5:00 p.m.
on the Expiration Date. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer."
Interest on the Notes will accrue from their date of original issuance and
will be payable semi-annually in arrears on June 15 and December 15 of each
year, commencing December 15, 1997, at the rate of 9 3/4% per annum. The Notes
will mature on June 15, 2007. The Notes are redeemable, in whole or in part, at
the option of the Company on or after June 15, 2002, at the redemption prices
set forth herein, plus accrued and unpaid interest, if any, to the date of
redemption. In addition, prior to June 15, 2000, the Company may, at its option,
redeem up to 33% of the aggregate principal amount of the Notes with the net
cash proceeds of one or more Equity Offerings (as defined), at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption; provided that at least $100.0 million aggregate principal amount
of the Notes remain outstanding after any such redemption. See "Description of
Exchange Notes."
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment to all senior indebtedness of the Company,
including indebtedness under the Credit Agreement (as defined), will be
structurally subordinated to all indebtedness of the subsidiaries of the Company
that do not become Subsidiary Guarantors (as defined), including the Trade
Receivable Facility (as defined), and will rank senior in right of payment to
the existing $404.3 million aggregate principal amount of 12 3/4% Senior
Subordinated Discount Debentures due 2005 (the "12 3/4% Debentures"). There are
currently no Subsidiary Guarantors of the Notes. All indebtedness under the
Credit Agreement is secured by substantially all of the assets of the Company.
At June 30, 1997, there was no outstanding indebtedness under the Credit
Agreement (but there was approximately $157.5 million of credit available under
the revolving portion of the Credit Agreement as well as undrawn letters of
credit of approximately $11.3 million) and the total outstanding indebtedness
under the Trade Receivable Facility was $43.0 million (with approximately $15.7
million of additional credit available under the Trade Receivable Facility). See
"Description of Exchange Notes."
Upon a Change of Control (as defined), the Company will be required to make
an offer to repurchase the Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
repurchase. Upon the occurrence of a Change of Control prior to June 15, 2002,
the Company, at its option, may redeem all, but not less than all, of the
outstanding Notes at a redemption price equal to 100% of the principal amount
thereof, plus the applicable Make-Whole Premium (as defined). In addition, the
Company will be obligated to offer to repurchase the Notes at 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to date of
repurchase in the event of certain asset sales. See "Description of Exchange
Notes."
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SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DESCRIPTION OF CERTAIN RISKS
TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR INITIAL NOTES IN THE EXCHANGE
OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
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Based upon an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Initial Notes may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes. See "The Exchange Offer -- Resale of
the Exchange Notes." Holders of Initial Notes wishing to accept the Exchange
Offer must represent to the Company, as required by the Registration Rights
Agreement, that such conditions have been met. Each broker-dealer (a
"Participating Broker-Dealer") that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Notes received in exchange
for Initial Notes where such Initial Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter is
being used in connection with the Exchange Offer.
Holders of Initial Notes not tendered and accepted in the Exchange Offer
will continue to hold such Initial Notes and will be entitled to all the rights
and benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. See "The
Exchange Offer."
There has not previously been any public market for the Initial Notes or
the Exchange Notes. The Company does not intend to list the Exchange Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors -- Absence of a Public Market
Could Adversely Affect the Value of Exchange Notes." Moreover, to the extent
that Initial Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Initial Notes could be
adversely affected.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF INITIAL NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL DECEMBER 8, 1997 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
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PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM.
EXCEPT AS DESCRIBED UNDER "BOOK-ENTRY; DELIVERY AND FORM", THE COMPANY EXPECTS
THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE
REPRESENTED BY A GLOBAL NOTE (AS DEFINED), WHICH WILL BE DEPOSITED WITH, OR ON
BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC") AND REGISTERED IN ITS NAME OR IN
THE NAME OF CEDE & CO., ITS NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL NOTE
REPRESENTING THE EXCHANGE NOTES WILL BE SHOWN ON, AND TRANSFERS THEREOF WILL BE
EFFECTED THROUGH, RECORDS MAINTAINED BY DTC AND ITS PARTICIPANTS. AFTER THE
INITIAL ISSUANCE OF THE GLOBAL NOTE, NOTES IN CERTIFICATED FORM WILL BE ISSUED
IN EXCHANGE FOR THE GLOBAL NOTE ONLY UNDER LIMITED CIRCUMSTANCES AS SET FORTH IN
THE INDENTURE. SEE "BOOK-ENTRY; DELIVERY AND FORM."
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE
CONTENTS OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR
SHOULD CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. NEITHER THE
COMPANY NOR ANY OTHER PERSON IS MAKING ANY REPRESENTATION TO ANY PROSPECTIVE
INVESTOR IN THE EXCHANGE NOTES REGARDING THE LEGALITY OF AN INVESTMENT THEREIN
BY SUCH PERSON UNDER APPROPRIATE LEGAL INVESTMENT OR SIMILAR LAWS.
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WERE OBTAINED FROM INTERNAL
COMPANY SURVEYS AND INDUSTRY PUBLICATIONS. INDUSTRY PUBLICATIONS GENERALLY STATE
THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED
TO BE RELIABLE, BUT THAT THE ACCURACY AND COMPLETENESS OF SUCH INFORMATION IS
NOT GUARANTEED. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED THIS MARKET DATA.
SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY THE COMPANY TO BE
RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL
RESULTS COULD DIFFER MATERIALLY. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE
NOT LIMITED TO, GENERAL ECONOMIC AND BUSINESS CONDITIONS, COMPETITIVE MARKET
PRICING, INCREASES IN RAW MATERIAL, ENERGY AND OTHER MANUFACTURING COSTS,
FLUCTUATIONS IN DEMAND FOR THE COMPANY'S PRODUCTS, POTENTIAL EQUIPMENT
MALFUNCTIONS AND PENDING LITIGATION.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the Exchange
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to the Company and the Exchange Offer, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of
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the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. The Exchange Offer Registration Statement, including the exhibits
thereto, and periodic reports and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at its regional offices located at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
was required to file such Forms, including for each a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereof by the Company's independent
certified public accountants and (ii) all reports that would be required to be
filed on Form 8-K if the Company were required to file such reports. In
addition, for so long as any of the Initial Notes remain outstanding, the
Company has agreed to make available to any prospective purchaser of the Initial
Notes or beneficial owner of the Initial Notes, in connection with any sale
thereof, the information required by Rule 144A(d)(4) under the Securities Act.
The Company, a corporation organized under the laws of Delaware, has its
principal executive offices located at 500 Lake Cook Road, Suite 400, Deerfield,
Illinois 60015; its telephone number is (847) 405-5500.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Commission pursuant to
the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
2. The Company's Quarterly Report on Form 10-Q for the quarterly
periods ended December 31, 1996, March 31, 1997 and June 30, 1997.
3. The Company's Current Report on Form 8-K dated June 6, 1997 and
filed June 19, 1997.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus
and prior to the Expiration Date, shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of the filing of such
reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in any other subsequently filed document which also is incorporated or
deemed to be incorporated by reference herein) modifies or supersedes such
previous statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Registration
Statement.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A PROSPECTUS IS DELIVERED A COPY
OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE IN
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THIS PROSPECTUS (NOT INCLUDING EXHIBITS TO THE INFORMATION INCORPORATED BY
REFERENCE UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
THE INFORMATION THAT THE PROSPECTUS INCORPORATES) UPON WRITTEN OR ORAL REQUEST
TO DAVID F. TANAKA, VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY OF
THE COMPANY, 500 LAKE COOK ROAD, SUITE 400, DEERFIELD, ILLINOIS 60015,
TELEPHONE: (847) 405-5500. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE MADE BY OCTOBER 1, 1997 (FIVE BUSINESS DAYS PRIOR TO THE
EXPIRATION DATE).
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and financial
statements, including notes thereto, appearing elsewhere in or incorporated by
reference into this Prospectus. Unless otherwise stated in this Prospectus or
unless the context otherwise requires, the "Company" refers to Gaylord Container
Corporation and its subsidiaries, and references to financial information
presented on a "pro forma basis" give effect to the Refinancing.
THE COMPANY
The Company is a major national manufacturer and distributor of brown paper
and brown paper packaging products. The Company produces linerboard and
unbleached kraft paper at its paper mills located in Bogalusa, Louisiana;
Antioch, California; and Pine Bluff, Arkansas. Through its network of 19
converting facilities, the Company converts the majority of its primary mill
products into corrugated containers and sheets and multiwall bags for the food,
beverage, agricultural and other industries. As of September 30, 1996, the
Company was the tenth largest domestic producer of linerboard with approximately
1.35 million tons of annual capacity and the fourth largest producer of
unbleached kraft paper with approximately 0.28 million tons of annual capacity.
Since its inception in 1986, the Company has made significant capital
expenditures primarily to expand capacity, install advanced paper making
technology, improve product quality, realize operating efficiencies and maintain
its existing facilities. As part of a major capital expenditure program
completed in fiscal 1990, the Company invested approximately $240 million to
expand capacity, improve operating efficiencies and enhance product quality at
the Company's mills, providing the Company with a high-quality, cost-effective
mill system. Mill productive capacity has increased by more than 65% compared to
1987 levels. The Company believes that all of its mills are low-cost producers
in their respective segments and that its Bogalusa mill is one of the premier
mills in the industry. The focus of the Company's current capital plan for the
five year period beginning in fiscal 1994 is on its converting operations, with
approximately 60% of the budgeted $250 million for that period allocated to
upgrading and expanding the Company's corrugated container, sheet feeder and bag
plants. The goal of the converting plant capital program is to increase capacity
and to achieve quality enhancements and cost efficiencies similar to those at
the Company's mills.
The Company's operating strategy is to maintain or improve its position as
a low-cost, high-quality producer of linerboard, unbleached kraft paper and
related converted products. Specifically, the Company has emphasized production
of high-performance linerboard, high-recycled content linerboard and packaging
products, and the use of multicolor packaging graphics, because it believes
these products represent the higher-growth segments of the brown paper packaging
industry. Further, the Company's goal is to become 100% forward integrated over
time by increasing converting capacity to a level that equals or exceeds its
mill productive capacity. The Company will also continue to seek growth
opportunities including acquisitions and other strategic investments.
Approximately 94% of the Company's linerboard productive capacity is
capable of manufacturing high-performance grades of linerboard, which have the
same performance characteristics as standard grades of linerboard, but achieve
these levels using less fiber which results in a lower basis weight. Basis
weight is the weight of linerboard per 1,000 square feet. When converted into a
corrugated container, high-performance linerboard, using the same square footage
as standard linerboard, reduces weight while maintaining performance
characteristics, and thus, is more economical.
The Company is also a major producer in the growing recycled linerboard and
packaging segments of the brown paper industry. The Antioch mill uses 100%
recycled fiber, and the Company as a whole uses approximately 820 thousand tons
annually of pre- and post-consumer waste as a fiber source. Recycled fiber
provides approximately 45% of the Company's fiber needs.
The Company continues to emphasize the use of high-quality packaging
graphics through a preprint linerboard facility, state-of-the-art multicolor
print capabilities at its converting facilities and computer-aided-design
systems at its corrugated container facilities to meet customers' growing demand
for these products and
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services. The Company believes participation in this segment provides higher
margins and a more stable customer base.
Consistent with its long term operating strategy, the Company intends to
continue to sell primary mill product to independent converters and to the
export market, and to purchase mill product in the open market. The Company
believes that increased forward integration will reduce the impact of primary
product price volatility on its profits, provide more stable demand (which
enhances efficiency) for the Company's mill production and increase its product
distribution capabilities. In fiscal 1996, the Company converted the equivalent
of approximately 80% of its linerboard production and converted or sold to its
grocery bag joint venture approximately 59% of its unbleached kraft paper
production. The Company intends to continue to increase converting capacity
through internal expansion, converting plant acquisitions and strategic joint
ventures.
THE REFINANCING
The Company believes that the Refinancing provides lower interest rates,
extended maturities and additional financial flexibility, thus enhancing the
Company's ability to implement its operating strategy.
Substantially all of the net proceeds of the Initial Note Offering were
used to redeem the outstanding Old Notes and to repay borrowings under the
Company's revolving credit facilities. Concurrently with the consummation of the
Initial Note Offering, the Company provided an irrevocable notice of the
exercise of its option to redeem all outstanding Old Notes and deposited into an
escrow account U.S. Treasury bills in an amount sufficient to fund 104.93% of
the principal amount of, plus accrued and unpaid interest on, the Old Notes to
July 13, 1997. The Old Notes were redeemed by the Escrow Agent (as defined) on
July 14, 1997.
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THE INITIAL OFFERING
Initial Notes...................... The Initial Notes were sold by the
Company on June 12, 1997 to BT Securities
Corporation, Bear, Stearns & Co. Inc. and
Salomon Brothers Inc (the "Initial
Purchasers") pursuant to a Purchase
Agreement dated June 5, 1997 (the
"Initial Offering"). The Initial
Purchasers subsequently placed the
Initial Notes with qualified
institutional buyers ("QIBs") pursuant to
Rule 144A under the Securities Act.
Registration Rights Agreement...... Pursuant to the Purchase Agreement, the
Company and the Initial Purchasers
entered into a Registration Rights
Agreement dated as of June 12, 1997 (the
"Registration Rights Agreement"), which
grants the holder of the Initial Notes
certain exchange and registration rights.
The Exchange Offer is intended to satisfy
such exchange rights which terminate upon
the consummation of the Exchange Offer.
Upon consummation of the Exchange Offer,
the Company will have no further
obligation under the Registration Rights
Agreement to register Initial Notes
except in the limited circumstances in
which the Company has agreed to file a
Shelf Registration Statement. See
"Prospectus Summary -- The Exchange
Offer -- Untendered Initial Notes" and
"The Exchange Offer -- Purpose and Effect
of the Exchange Offer."
THE EXCHANGE OFFER
Securities Offered................. $225,000,000 aggregate principal amount
of 9 3/4% Senior Notes due 2007, Series
B, of the Company (the "Exchange Notes").
The Exchange Offer................. $1,000 principal amount of Exchange Notes
in exchange for each $1,000 principal
amount of Initial Notes. As of the date
hereof, $225,000,000 aggregate principal
amount of Initial Notes are outstanding.
The Company will issue the Exchange Notes
to holders on or promptly after the
Expiration Date.
Based on an interpretation by the staff
of the Commission set forth in no-action
letters issued to third parties, the
Company believes that Exchange Notes
issued pursuant to the Exchange Offer in
exchange for Initial Notes may be offered
for resale, resold and otherwise
transferred by any holder thereof (other
than any such holder which is an
"affiliate" of the Company within the
meaning of Rule 405 under the Securities
Act) without compliance with the
registration and prospectus delivery
provisions of the Securities Act,
provided that such Exchange Notes are
acquired in the ordinary course of such
holder's business and that such holder
does not intend to participate and has no
arrangement or understanding with any
person to participate in the distribution
of such Exchange Notes.
Any Participating Broker-Dealer that
acquired Initial Notes for its own
account as a result of market-making
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activities or other trading activities
may be a statutory underwriter. Each
Participating Broker-Dealer that receives
Exchange Notes for its own account
pursuant to the Exchange Offer must
acknowledge that it will deliver a
prospectus in connection with any resale
of such Exchange Notes. The Letter of
Transmittal states that by so
acknowledging and by delivering a
prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it
may be amended or supplemented from time
to time, may be used by a Participating
Broker-Dealer in connection with resales
of Exchange Notes received in exchange
for Initial Notes where such Initial
Notes were acquired by such Participating
Broker-Dealer as a result of
market-making activities or other trading
activities. The Company has agreed that,
for a period of 180 days after the
Expiration Date, it will make this
Prospectus available to any Participating
Broker-Dealer for use in connection with
any such resale. See "Plan of
Distribution."
Any holder who tenders in the Exchange
Offer with the intention to participate,
or for the purpose of participating, in a
distribution of the Exchange Notes could
not rely on the position of the staff of
the Commission enunciated in no-action
letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resale transaction.
Failure to comply with such requirements
in such instance may result in such
holder incurring liability under the
Securities Act for which the holder is
not indemnified by the Company.
Expiration Date.................... 5:00 p.m., New York City time, on October
8, 1997 unless the Exchange Offer is
extended, in which case the term
"Expiration Date" means the latest date
and time to which the Exchange Offer is
extended.
Accrued Interest on the Exchange
Notes and the Initial Notes........ Each Exchange Note will bear interest
from its issuance date. Holders of
Initial Notes that are accepted for
exchange will receive, in cash, accrued
interest thereon to, but not including,
the issuance date of the Exchange Notes.
Such interest will be paid with the first
interest payment on the Exchange Notes on
December 15, 1997. Interest on the
Initial Notes accepted for exchange will
cease to accrue upon issuance of the
Exchange Notes.
Interest on the Exchange Notes is payable
semi-annually on each June 15 and
December 15, commencing on December 15,
1997.
Conditions to the Exchange Offer... The Exchange Offer is subject to certain
customary conditions, which may be waived
by the Company. See "The Exchange
Offer--Conditions."
4
<PAGE> 11
Procedures for Tendering Initial
Notes.............................. Each holder of Initial Notes wishing to
accept the Exchange Offer must complete,
sign and date the accompanying Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of
Transmittal, or such facsimile, together
with the Initial Notes and any other
required documentation to the Exchange
Agent (as defined) to the address set
forth herein. By executing the Letter of
Transmittal, each holder represents to
the Company that, among other things, the
Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such Exchange Notes, whether or
not such person is the holder, that
neither the holder nor any such other
person has any arrangement or
understanding with any person to
participate in the distribution of such
Exchange Notes and that neither the
holder nor any such other person is an
"affiliate," as defined under Rule 405 of
the Securities Act, of the Company. See
"The Exchange Offer -- Purpose and Effect
of the Exchange Offer" and "-- Procedures
for Tendering."
Untendered Initial Notes........... Following the consummation of the
Exchange Offer, holders of Initial Notes
eligible to participate but who do not
tender their Initial Notes will not have
any further exchange rights and such
Initial Notes will continue to be subject
to certain restrictions on transfer.
Accordingly, the liquidity of the market
for such Initial Notes could be adversely
affected.
Consequences of Failure to
Exchange........................... The Initial Notes that are not exchanged
pursuant to the Exchange Offer will
remain restricted securities.
Accordingly, such Initial Notes may be
resold only (i) to the Company, (ii)
pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some
other exemption under the Securities Act,
(iii) outside the United States to a
foreign person pursuant to the
requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an
effective registration statement under
the Securities Act. See "The Exchange
Offer -- Consequences of Failure to
Exchange."
Federal Income Tax
Considerations..................... The Company believes that the exchange of
Initial Notes for Exchange Notes pursuant
to the Exchange Offer will not be treated
as an "exchange" for federal income tax
purposes because the Exchange Notes will
not be considered to differ materially in
kind or extent from the Initial Notes.
Shelf Registration Statement....... If any holder of the Initial Notes (other
than any such holder which is an
"affiliate" of the Company or a
Subsidiary Guarantor within the meaning
of Rule 405 under the Securities Act) is
not eligible under applicable securities
laws to participate in the Exchange
Offer, and such holder
5
<PAGE> 12
has satisfied certain conditions relating
to the provision of information to the
Company for use therein, the Company has
agreed to register the Initial Notes on a
shelf registration statement (the "Shelf
Registration Statement") and use its best
efforts to cause it to be declared
effective by the Commission as promptly
as practical on or after the consummation
of the Exchange Offer. The Company has
agreed to maintain the effectiveness of
the Shelf Registration Statement for,
under certain circumstances, a maximum of
two years, to cover resales of the
Initial Notes held by any such holders.
Special Procedures for Beneficial
Owners............................. Any beneficial owner whose Initial Notes
are registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and who wishes to tender
should contact such registered holder
promptly and instruct such registered
holder to tender on such beneficial
owner's behalf. If such beneficial owner
wishes to tender on such owner's own
behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Initial
Notes, either make appropriate
arrangements to register ownership of the
Initial Notes in such owner's name or
obtain a properly completed bond power
from the registered holder. The transfer
of registered ownership may take
considerable time. The Company will keep
the Exchange Offer open for not less than
twenty business days in order to provide
for the transfer of registered ownership.
Guaranteed Delivery Procedures..... Holders of Initial Notes who wish to
tender their Initial Notes and whose
Initial Notes are not immediately
available or who cannot deliver their
Initial Notes, the Letter of Transmittal
or any other documents required by the
Letter of Transmittal to the Exchange
Agent (or comply with the procedures for
book-entry transfer) prior to the
Expiration Date must tender their Initial
Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights.................. Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City time,
on the Expiration Date.
Acceptance of Initial Notes and
Delivery of Exchange Notes......... The Company will accept for exchange any
and all Initial Notes which are properly
tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer
-- Terms of the Exchange Offer."
Use of Proceeds.................... There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer.
Exchange Agent..................... State Street Bank and Trust Company.
6
<PAGE> 13
THE EXCHANGE NOTES
General............................ The form and terms of the Exchange Notes
are the same as the form and terms of the
Initial Notes (which they replace) except
that (i) the Exchange Notes bear a Series
B designation and a different CUSIP
number, (ii) the issuance of the Exchange
Notes has been registered under the
Securities Act and, therefore, the
Exchange Notes will not bear legends
restricting the transfer thereof, and
(iii) the holders of Exchange Notes will
not be entitled to certain rights under
the Registration Rights Agreement,
including the provisions providing for an
increase in the interest rate on the
Initial Notes in certain circumstances
relating to the timing of the Exchange
Offer, which rights will terminate when
the Exchange Offer is consummated. See
"The Exchange Offer -- Purpose and Effect
of the Exchange Offer." The Exchange
Notes will evidence the same debt as the
Initial Notes and will be entitled to the
benefits of the Indenture. See
"Description of Exchange Notes."
Exchange Notes Offered............. $225,000,000 aggregate principal amount
of 9 3/4% Senior Notes due 2007, Series
B.
Maturity Date...................... June 15, 2007.
Interest Rate and Payment Dates.... The Exchange Notes will bear interest at
a rate of 9 3/4% per annum. Interest on
the Exchange Notes will accrue from the
date of issuance (the "Issue Date") and
is payable semi-annually on each June 15
and December 15, commencing December 15,
1997.
Optional Redemption................ The Exchange Notes are redeemable, in
whole or in part, at the option of the
Company on or after June 15, 2002, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to
the date of redemption. In addition,
prior to June 15, 2000, the Company, at
its option, may redeem up to 33% of the
aggregate principal amount of the
Exchange Notes with the net cash proceeds
of one or more Equity Offerings at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to
the date of redemption; provided that at
least $100.0 million aggregate principal
amount of the Notes remain outstanding
after any such redemption. See
"Description of Exchange Notes --
Optional Redemption."
Change of Control.................. Upon a Change of Control, the Company
will be obligated to offer to repurchase
all outstanding Notes at a price equal to
101% of their principal amount, plus
accrued and unpaid interest, if any, to
the date of repurchase. There can be no
assurance that, in the event of a Change
of Control, the Company will have, or be
able to obtain, sufficient funds to
repurchase the Notes or that the Company
will be permitted to do so under the
Credit Agreement or any other
indebtedness outstanding at such time.
See "Risk Factors -- Purchase of the
Notes Upon Change of Control." As
defined, a "Change of Control" may not
include certain transactions which
involve the transfer of
7
<PAGE> 14
additional voting power to certain
affiliates or significant corporate
transactions not involving transfers of
voting power in excess of certain levels.
In addition, upon the occurrence of a
Change of Control prior to June 15, 2002,
the Company, at its option, may redeem
all, but not less than all, of the
outstanding Notes at a redemption price
equal to 100% of the principal amount
thereof plus the applicable Make-Whole
Premium. See "Description of Exchange
Notes -- Change of Control."
Offers to Purchase................. In the event of certain asset sales, the
Company will be required to offer to
repurchase the Notes at 100% of their
principal amount, plus accrued and unpaid
interest, if any, to the date of
repurchase, with the net proceeds of such
asset sales.
Ranking............................ The Exchange Notes will be general
unsecured obligations of the Company,
will rank pari passu in right of payment
to all senior indebtedness of the Company
including indebtedness under the Credit
Agreement, will be structurally
subordinated to all indebtedness of the
subsidiaries of the Company that do not
become Subsidiary Guarantors, including
the Trade Receivable Facility, and will
rank senior in right of payment to the
existing $404.3 million aggregate
principal amount of 12 3/4% Debentures.
All indebtedness under the Credit
Agreement is secured by substantially all
of the assets of the Company. At June 30,
1997, there was no outstanding
Indebtedness under the Credit Agreement
(but there was approximately $157.5
million of credit available under the
revolving portion of the Credit Agreement
as well as undrawn letters of credit of
approximately $11.3 million) and the
total outstanding indebtedness under the
Trade Receivable Facility was $43.0
million (with approximately $15.7 million
of additional credit available under the
Trade Receivable Facility). See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Liquidity and Capital
Resources" and "Description of Exchange
Notes."
Certain Covenants.................. The indenture pursuant to which the
Exchange Notes will be issued (the
"Indenture") imposes certain limitations
on the ability of the Company and its
Restricted Subsidiaries (as defined) to,
among other things, incur additional
indebtedness, incur liens, pay dividends
or make certain other restricted payments
or restricted investments, consummate
certain asset sales, enter into certain
transactions with affiliates, impose
restrictions on the ability of a
subsidiary to pay dividends or make
certain payments to the Company and its
Restricted Subsidiaries, merge or
consolidate with any other person or
sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially
all of the Company's assets. The
Indenture also requires the Company's
Restricted Subsidiaries to become
guarantors of the Exchange Notes under
certain circumstances. There are
currently no Subsidiary Guarantors of the
Notes.
For additional information regarding the Exchange Notes, see "Description of
Exchange Notes."
8
<PAGE> 15
USE OF PROCEEDS
There will be no cash proceeds to the Company from the exchange pursuant to
the Exchange Offer. The Company used the proceeds of the Initial Offering to
redeem the Old Notes pursuant to the Redemption and to repay borrowings under
the Company's revolving credit facilities. See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" beginning on page 12 for a discussion of certain factors
that should be considered before tendering Initial Notes in exchange for
Exchange Notes. These risk factors are generally applicable to the Initial Notes
as well as the Exchange Notes.
9
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical consolidated financial data of the Company
for the years ended September 30, 1994, 1995 and 1996 (other than operating
data) were derived from the historical audited consolidated financial statements
of the Company. The following summary historical consolidated financial data of
the Company as of June 30, 1997 and for the nine months ended June 30, 1996 and
1997 were derived from unaudited consolidated financial statements of the
Company, which, in the opinion of the Company, reflect all adjustments necessary
for a fair presentation of the results for the unaudited periods. The following
summary unaudited pro forma consolidated income statement and other data have
been prepared to give effect to the Refinancing as if such transaction occurred
on October 1, 1995.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30,(1) ENDED JUNE 30,
----------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996(2) 1996 1997 1997(2)
---- ---- ---- --------- ---- ---- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales..................................... $ 784.4 $1,051.4 $ 922.0 $ 922.0 $698.6 $577.4 $577.4
Gross margin.................................. 93.0 296.4 205.8 205.8 163.8 43.1 43.1
Selling and administrative costs.............. (81.0) (95.5) (99.1) (99.1) (71.4) (61.5) (61.5)
Non-recurring charges......................... (15.5) (5.4) (8.1) (8.1) -- -- --
Operating earnings (loss)..................... (3.5) 195.5 98.6 98.6 92.4 (18.4) (18.4)
Interest expense -- net....................... (80.3) (86.1) (78.3) (79.5) (57.9) (60.0) (60.6)
Income (loss) before income taxes............. (84.0) 110.0 20.1 18.9 34.8 (79.2) (79.8)
Income tax benefit (expense).................. -- 24.2 (8.3) (7.8) (14.4) 31.1 31.3
Income (loss) before extraordinary item and
accounting change........................... (84.0) 134.2 11.8 11.1 20.4 (48.1) (48.5)
Extraordinary item and accounting change...... -- -- (3.2) (3.2) (2.6) (7.7) --
Net income (loss)............................. (84.0) 134.2 8.6 7.9 17.8 (55.8) (48.5)
Earnings per share:
Income (loss) before extraordinary item and
accounting change......................... (1.57) 2.44 0.22 0.20 0.37 (0.91) (0.91)
Extraordinary item and accounting change.... -- -- (0.06) (0.06) (0.05) (0.15) --
Net income (loss)........................... (1.57) 2.44 0.16 0.14 0.32 (1.06) (0.91)
Cash dividends per share...................... -- -- -- -- --
Weighted average shares outstanding........... 53.6 55.1 54.7 54.7 55.1 52.8 52.8
Ratio of earnings to fixed charges(3)......... -- 2.2x 1.2x 1.2x 1.6x -- --
Deficit of earnings to fixed charges(3)....... 84.9 -- -- -- -- 79.9 80.5
OTHER DATA:
Net cash provided by (used for) operations.... $ 29.7 $ 194.2 $ 164.4 $118.4 $(72.6)
Net cash used for investments................. (34.9) (61.3) (53.5) (38.1) (23.7)
Net cash provided by (used for) financing..... (5.0) (117.8) (104.2) (80.4) 64.0
Depreciation and amortization(4).............. 61.2 64.8 64.5 48.6 49.1
Capital expenditures.......................... 40.4 58.9 54.8 39.4 22.8
EBITDA(4)..................................... 69.6 260.4 167.9 138.6 28.3
Ratio of EBITDA to interest expense -- net.... 0.9x 3.0x 2.1x 2.4x 0.5x
OPERATING DATA:
Production:
Containerboard (thousand tons).............. 1,194.9 1,200.5 1,243.3 884.5 936.9
Unbleached kraft paper (thousand tons)...... 250.7 263.9 256.9 187.4 205.2
Shipments:
Corrugated containers (billion square
feet)..................................... 12.7 12.3 13.3 9.5 10.1
Multiwall bags (thousand tons).............. 51.5 52.4 51.9 37.2 43.0
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1994 1995 1996 1997
---- ---- ---- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 71.6 $156.4 $ 69.8 $ 85.3
Property -- net........................................... 592.9 640.0 612.3 590.5
Total assets.............................................. 843.1 988.0 933.0 913.0
Long-term debt............................................ 696.8 671.5 623.1 704.0
Stockholders' equity...................................... (23.8) 113.2 114.5 60.1
</TABLE>
10
<PAGE> 17
(1) The Company operates on a 52/53 week fiscal year. Fiscal 1994 and fiscal
1995 were 52-week years and fiscal 1996 was a 53-week year. Certain
information under Other Data has been reclassified to conform with the
current year presentation.
(2) The summary unaudited pro forma consolidated income statement and other data
have been prepared to give effect to the issuance of $225 million principal
amount of the Company's 9 3/4% Senior Notes due 2007 and the redemption of
$179.7 million principal amount of the Company's 11 1/2% Senior Notes due
2001 as if such transaction occurred on October 1, 1995. Pro forma interest
expense for the year ended September 30, 1996 and the nine months ended June
30, 1997 has been increased by the interest expense relating to the Notes
($22.5 million and $15.7 million, respectively, including amortization of
deferred financing costs) and reduced by the interest expense relating to
the Old Notes ($21.3 million and $15.1 million, respectively, including
amortization of deferred financing costs). The Pro Forma interest expense
has not been adjusted to reflect the effect of the repayment of borrowings
under the Company's revolving credit facilities (which would on a pro forma
basis have amounted to $0.5 million for the year ended September 30, 1996
and $0.8 million for the nine months ended June 30, 1997) or the investment
of excess cash available after the repayment. Accordingly, interest expense
-- net would have been lower. The redemption premium (approximately $8.9
million) and write-off of deferred financing fees associated with the Old
Notes, together with certain other items, resulted in an extraordinary loss
of approximately $7.7 million which is net of an income tax benefit of $5.0
million. The loss, which is not reflected in the pro forma income statement
data, was recognized in the third quarter of fiscal 1997.
(3) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary item, interest expense, taxes and one-third of
rent expense by the sum of interest expense and one-third of rent expense.
For the year ended September 30, 1994 and the nine months ended June 30,
1997, earnings before fixed charges were insufficient to cover fixed charges
by $84.9 million and $79.9 million, respectively. On a pro forma basis for
the nine months ended June 30, 1997, earnings before fixed charges were
insufficient to cover fixed charges by $80.5 million.
(4) "EBITDA" represents, for any relevant period, the sum of operating earnings,
depreciation of property, plant and equipment, amortization of intangible
assets included in operating earnings and non-recurring charges. The amounts
shown for depreciation and amortization include $3.6 million, $5.3 million,
$3.3 million, $2.4 million and $2.4 million of amortization of deferred
financing costs included in interest expense for fiscal 1994, fiscal 1995,
fiscal 1996 and for the nine months ended June 30, 1996 and 1997,
respectively. EBITDA is not a measure of financial performance under
generally accepted accounting principles, should not be construed as an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) or to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles),
and does not necessarily indicate that cash flow will be sufficient to fund
cash requirements. The Company understands that certain investors believe
that EBITDA provides useful information regarding the Company's ability to
service debt and to utilize cash for other purposes. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operations, or other income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
operating performance, profitability or liquidity. In addition, EBITDA may
not be comparable to other similarly titled measures of other companies.
11
<PAGE> 18
RISK FACTORS
In addition to the other information set forth in this Prospectus,
prospective purchasers of the Initial Notes should carefully consider the
following risk factors before tendering Initial Notes in exchange for Exchange
Notes. The risk factors set forth below are generally applicable to the Initial
Notes as well as the Exchange Notes.
LEVERAGE
At June 30, 1997, the Company had $715.0 million of total debt and $60.1
million of stockholders' equity and approximately $173.2 million of credit
available under the revolving portions of the credit facilities. In addition,
subject to the restrictions in the Credit Agreement, the 12 3/4% Debenture
Indenture (as defined) and the Indenture, the Company may incur additional
indebtedness from time to time to finance acquisitions or capital expenditures
or for other purposes. See "Description of Other Indebtedness and Other
Obligations."
For the fiscal year ended September 30, 1996, on a pro forma basis after
giving effect to the Refinancing as if it had occurred on October 1, 1995, the
Company's ratio of earnings to fixed charges would have been 1.2:1. For the nine
months ended June 30, 1997, earnings before fixed charges would have been
insufficient to cover fixed charges by $80.5 million on the same pro forma
basis.
The level of the Company's indebtedness could have important consequences
to holders of the Exchange Notes, including: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to debt service and will
not be available for other purposes; (ii) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures or acquisitions may be limited; and (iii) the Company's level of
indebtedness could limit its flexibility in reacting to changes in the industry
and economic conditions generally. Some of the Company's competitors currently
operate on a less leveraged basis and have significantly greater operating and
financing flexibility than the Company. The Company's ability to pay interest on
the Exchange Notes and to satisfy its other debt obligations will depend upon
its future operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, some of which are beyond
its control. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
RANKING
The Exchange Notes will be general unsecured obligations of the Company and
will rank pari passu in right of payment to all senior indebtedness of the
Company, including indebtedness under the Credit Agreement. All indebtedness
under the Credit Agreement is secured by substantially all of the assets of the
Company. As of June 30, 1997, there was no outstanding indebtedness under the
Credit Agreement, but there was approximately $157.5 million of credit available
under the Credit Agreement. As of June 30, 1997, the Company also had
approximately $11.3 million of undrawn letters of credit outstanding under the
Credit Agreement. In addition, certain other senior indebtedness of the Company
is secured by the properties financed with such indebtedness. The Exchange Notes
will rank senior in right of payment to the 12 3/4% Debentures. As of June 30,
1997, the Company had outstanding approximately $404.3 million aggregate
principal amount of its 12 3/4% Debentures. In the event of a bankruptcy,
liquidation or reorganization of the Company, in the event of a Change of
Control or a significant asset disposition or in the event that any default in
payment of any secured indebtedness, holders of secured indebtedness of the
Company will be entitled to payment in full from the proceeds of all assets of
the Company pledged to secure such indebtedness prior to any payment of such
proceeds to holders of the Exchange Notes. Consequently, there can be no
assurances that the Company will have sufficient funds to make such payments to
holders of the Exchange Notes. See "Description of Exchange Notes" and
"Description of Other Indebtedness and Other Obligations."
The Exchange Notes will be structurally subordinated to existing and future
liabilities of the Company's subsidiaries that do not become Subsidiary
Guarantors, including trade payables and the Trade Receivable Facility, as to
the assets of such subsidiaries. As of June 30, 1997, liabilities (including
trade payables) of the subsidiaries of the Company were approximately $44.5
million, including $43.0 million under the Trade
12
<PAGE> 19
Receivable Facility (with approximately $15.7 million of additional credit
available under the Trade Receivable Facility).
INDUSTRY AND CYCLICAL FACTORS
Demand for corrugated containers, containerboard and unbleached kraft paper
is cyclical and has historically corresponded to changes in the rate of growth
in the U.S. economy and exchange rates for the U.S. dollar. Growth in the U.S.
economy generally stimulates demand for packaging products. In addition,
weakness of the U.S. dollar versus the currencies of the United States' major
trading partners stimulates domestic demand for corrugated products and makes
export sales of containerboard more price competitive.
The cyclicality of demand is accentuated by the inelasticity of supply due
to the capital intensive nature of the industry. Because productive capacity
cannot be added quickly, during periods of rising demand containerboard and
unbleached kraft paper inventory levels tend to fall, exerting upward pressure
on prices. In periods when capacity exceeds demand, efforts to control inventory
levels are limited because containerboard and unbleached kraft paper mills
operate most economically near capacity operating levels.
Adverse pricing conditions have affected the paper and corrugated container
industry generally since the fall of 1995 and, as a result, the Company's cash
flow levels have been substantially reduced. The Company will continue to be
unprofitable until industry pricing conditions improve. During the nine months
ended June 30, 1997, the Company's operating results were adversely affected by
a continued decline in product prices compared to the comparable prior nine
months. Unless there is significant price improvement in fiscal 1998,
modifications would be required to certain financial covenants in the Credit
Agreement. There can be no assurance that adverse industry conditions will not
continue or worsen. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Other Indebtedness and Other Obligations."
In recent years, a number of domestic and foreign competitors have
increased their utilization of recycled fiber. This increased utilization of
recycled fiber has resulted in greater volatility of recycled fiber costs. The
volatility of recycled fiber costs may be particularly acute when linerboard
prices increase. See "Business -- Raw Materials"
COMPETITION
Many of the Company's competitors are substantially larger and have
significantly greater financial resources; however, the most important
competitive factors are price, quality and service. The manufacture of
containerboard and unbleached kraft paper is capital intensive with high
barriers to entry because new facilities require substantial capital and take at
least two years to construct. Many of the Company's larger competitors own
timberlands. Although the Company does not own timberlands, it has fiber supply
agreements covering a substantial portion of its fiber needs. Such agreements
covered approximately 40% of the Company's pulpwood and wood chip requirements
in fiscal 1996.
In contrast to the containerboard and unbleached kraft paper segment of the
industry, the converting segment, which manufactures corrugated products and
multiwall bags, has comparatively low barriers to entry. Competition in
corrugated products and, to a lesser extent, multiwall bags, is primarily
localized, with proximity to customers an important factor in minimizing
shipping costs. There are a substantial number of competitors in each of the
geographic areas in which the Company's converting facilities are located. Many
of such competing facilities are owned by other integrated producers.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture will restrict, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, impose restrictions on the ability of a subsidiary to
pay dividends or
13
<PAGE> 20
make certain payments to the Company and incur indebtedness, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company.
The Credit Agreement contains certain restrictions on the Company's
operations and contains requirements that the Company achieve and maintain
certain financial ratios. Such restrictions include, among other things,
limitations on the ability of the Company and its subsidiaries to incur
additional indebtedness, to create, incur or permit the existence of certain
liens, to make certain investments, to make capital expenditures above certain
levels, to make certain sales of assets, to make certain payments with respect
to its outstanding stock, to effect certain fundamental changes and to enter
into certain types of transactions. There can be no assurance that the Company
will be able to achieve and maintain compliance with the prescribed financial
ratio tests or other requirements of the Credit Agreement. Failure to achieve or
maintain compliance with such financial ratio tests or other requirements under
the Credit Agreement would result in an event of default and could lead to the
acceleration of the Company's obligations under the Credit Agreement as well as
the acceleration of other indebtedness of the Company which, by the terms of the
instruments creating, evidencing or governing such indebtedness, would be in
default upon an acceleration under the Credit Agreement. All indebtedness under
the Credit Agreement is secured by substantially all of the assets of the
Company. See "Description of Other Indebtedness and Other Obligations -- Credit
Agreement."
The 12 3/4% Debenture Indenture restricts, among other things, the
Company's ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, incur indebtedness that is subordinate in
right of payment to any Senior Debt (as defined in the 12 3/4% Debenture
Indenture) and senior in right of payment to the 12 3/4% Debentures, impose
restrictions on the ability of a subsidiary to pay dividends or make certain
payments to the Company, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of the Company.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local environmental requirements,
particularly relating to air and water quality, waste disposal and the cleanup
of contaminated soil and groundwater, is a significant factor in the Company's
business. The Company made capital expenditures for environmental purposes of
approximately $4.3 million, $5.5 million and $2.3 million in fiscal 1996, fiscal
1995 and fiscal 1994, respectively. Inherent in manufacturing operations and the
real estate ownership activity of the Company is the risk of environmental
liabilities as a result of both current and past operations, which cannot be
predicted with certainty. The Company has incurred and will continue to incur
costs, on an ongoing basis, associated with environmental regulatory compliance
in its business. The Company believes that it is in compliance in all material
respects with applicable federal, state and local environmental regulations.
Although the Company will attempt to be in compliance with all existing
environmental regulatory requirements, any newly adopted legislation or
regulations, and changed interpretation of existing legislation or regulations,
there can be no assurance that the Company will be in compliance, and any such
noncompliance could have a material adverse effect on the Company. See "Business
- -- Environmental Matters."
LITIGATION
The Company is a party to various legal proceedings, including litigation
incidental to normal business activities and other litigation described in
"Business -- Legal Proceedings." The Company believes the outcome of such
litigation will not have a material adverse effect on the Company's financial
position, results of operations or cash flows. There can be no assurance,
however, that such litigation will not have such a material adverse effect.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF EXCHANGE NOTES
The Initial Notes were issued to, and the Company believes are currently
owned by, a relatively small number of beneficial owners. Prior to the Exchange
Offer, there was no public market for the Initial Notes. The Initial Notes have
not been registered under the Securities Act and will be subject to restrictions
on transferability to the extent that they are not exchanged for Exchange Notes
by holders who are entitled to participate in this Exchange Offer. After
consummation of the Exchange Offer, the market for Initial Notes
14
<PAGE> 21
not tendered or exchanged (or tendered but not accepted for exchange) in the
Exchange Offer will be more limited than their existing market. The holders of
Initial Notes (other than any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) who are not eligible to
participate in the Exchange Offer are entitled to certain registration rights,
and the Company is required to file a Shelf Registration Statement with respect
to such Initial Notes. The Exchange Notes will constitute a new issue of
securities with no established trading market. The Company does not intend to
list the Exchange Notes on any national securities exchange or seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Initial Purchasers have advised the Company that
they currently intend to make a market in the Exchange Notes, but they are not
obligated to do so and may discontinue such market making at any time. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer and the pendency of the Shelf Registration Statement. Accordingly, no
assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of the trading market for the Exchange
Notes. If a trading market does not develop or is not maintained, holders of the
Exchange Notes may experience difficulty in reselling the Exchange Notes or may
be unable to sell them at all. If a market for the Exchange Notes develops, any
such market may be discontinued at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from their
principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Initial Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
such Initial Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Initial Notes
desiring to tender such Initial Notes in exchange for Exchange Notes should
allow sufficient time to ensure timely delivery. The Company is under no duty to
give notification of defects or irregularities with respect to the tenders of
Initial Notes for exchange. Initial Notes that are not tendered or are tendered
but not accepted will, following the consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof, and,
upon consummation of the Exchange Offer certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of Initial
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Initial Notes, where such Initial Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." To the
extent that Initial Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Initial Notes could be
adversely affected. See "The Exchange Offer."
PURCHASE OF THE EXCHANGE NOTES UPON CHANGE OF CONTROL
Upon a Change of Control (such as, for example, the acquisition of a
majority of the outstanding voting stock of the Company by a third party), the
Company is required to offer to purchase all outstanding Exchange Notes at 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase. The source of funds for any such purchase will be the
Company's available cash or cash generated from operations or other sources,
including borrowings, sales of assets, sales of equity or funds provided by a
new controlling person. However, there can be no assurance that in the event of
a Change of Control, the Company will have or be able to obtain sufficient funds
to repurchase the Exchange Notes, or that the Company will be permitted to do so
under the Credit Agreement or any other indebtedness outstanding at such time.
See "Description of Exchange Notes -- Change of Control."
15
<PAGE> 22
THE COMPANY
GENERAL
The Company is a major national manufacturer and distributor of brown paper
and brown paper packaging products. The Company produces linerboard and
unbleached kraft paper at its paper mills located in Bogalusa, Louisiana;
Antioch, California; and Pine Bluff, Arkansas. Through its network of 19
converting facilities, the Company converts the majority of its primary mill
products into corrugated containers and sheets and multiwall bags for the food,
beverage, agricultural and other industries. As of September 30, 1996, the
Company was the tenth largest domestic producer of linerboard with approximately
1.35 million tons of annual capacity and the fourth largest producer of
unbleached kraft paper with approximately 0.28 million tons of annual capacity.
Since its inception in 1986, the Company has made significant capital
expenditures primarily to expand capacity, install advanced paper making
technology, improve product quality, realize operating efficiencies and maintain
its existing facilities. As part of a major capital expenditure program
completed in fiscal 1990, the Company invested approximately $240 million to
expand capacity, improve operating efficiencies and enhance product quality at
the Company's mills, providing the Company with a high-quality, cost-effective
mill system. Mill productive capacity has increased by more than 65% compared to
1987 levels. The Company believes that all of its mills are low-cost producers
in their respective segments and that its Bogalusa mill is one of the premier
mills in the industry. The focus of the Company's current capital plan for the
five year period beginning in fiscal 1994 is on its converting operations, with
approximately 60% of the budgeted $250 million for that period allocated to
upgrading and expanding the Company's corrugated container, sheet feeder and bag
plants. The goal of the converting plant capital program is to increase capacity
and to achieve quality enhancements and cost efficiencies similar to those at
the Company's mills.
OPERATING STRATEGY
The Company's operating strategy is to maintain or improve its position as
a low-cost, high-quality producer of linerboard, unbleached kraft paper and
related converted products. Specifically, the Company has emphasized production
of high-performance linerboard, high-recycled content linerboard and packaging
products, and the use of multicolor packaging graphics, because it believes
these represent the higher-growth segments of the brown paper packaging
industry. Further, the Company's goal is to become 100% forward integrated over
time by increasing converting capacity to a level that equals or exceeds its
mill productive capacity. The Company will also continue to seek growth
opportunities including acquisitions and other strategic investments.
High-Performance Linerboard. Approximately 94% of the Company's linerboard
productive capacity is capable of manufacturing high-performance grades of
linerboard, which have the same performance characteristics as standard grades
of linerboard, but achieve these levels using less fiber which results in a
lower basis weight. Basis weight is the weight of linerboard per 1,000 square
feet. When converted into a corrugated container, high-performance linerboard,
using the same square footage as standard linerboard, reduces weight while
maintaining performance characteristics, and thus, is more economical.
Recycled Linerboard and Recycled Packaging. The Company is also a major
producer in the growing recycled linerboard and packaging segments of the brown
paper industry. The Antioch mill uses 100% recycled fiber, and the Company as a
whole uses approximately 820 thousand tons annually of pre- and post-consumer
waste as a fiber source. Recycled fiber provides approximately 45% of the
Company's fiber needs.
Enhanced Graphic Capabilities. The Company continues to emphasize the use
of high-quality packaging graphics through a preprint linerboard facility,
state-of-the-art multicolor print capabilities at its converting facilities and
computer-aided-design systems at its corrugated container facilities to meet
customers' growing demand for these products and services. The Company believes
participation in this segment provides higher margins and a more stable customer
base.
16
<PAGE> 23
Integration. Consistent with its long term operating strategy, the Company
intends to continue to sell primary mill product to independent converters and
to the export market, and to purchase mill product in the open market. The
Company believes that increased forward integration will reduce the impact of
primary product price volatility on its profits, provide more stable demand
(which enhances efficiency) for the Company's mill production and increase its
product distribution capabilities. In fiscal 1996, the Company converted the
equivalent of approximately 80% of its linerboard production and converted or
sold to its grocery bag joint venture approximately 59% of its unbleached kraft
paper production. The Company intends to continue to increase converting
capacity through internal expansion, converting plant acquisitions and strategic
joint ventures.
THE REFINANCING
The Company believes that the Refinancing provides lower interest rates,
extended maturities and additional financial flexibility, thus enhancing the
Company's ability to implement its operating strategy.
Substantially all of the net proceeds of the Initial Note Offering were
used to redeem the outstanding Old Notes and to repay borrowings under the
Company's revolving credit facilities. Concurrently with the consummation of the
Initial Note Offering, the Company provided an irrevocable notice of the
exercise of its option to redeem all outstanding Old Notes and deposited into an
escrow account U.S. Treasury bills in an amount sufficient to fund 104.93% of
the principal amount of, plus accrued and unpaid interest on, the Old Notes to
July 13, 1997. The Old Notes were redeemed by the Escrow Agent on July 14, 1997.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Initial Notes in like
principal amount, the form and terms of which are the same as the form and terms
of the Exchange Notes (which replace the Initial Notes), except as otherwise
described herein. The Initial Notes surrendered in exchange for Exchange Notes
will be retired and canceled and cannot be reissued. Accordingly, issuance of
the Exchange Notes will not result in any increase or decrease in the
indebtedness of the Company. As such, no effect has been given to the Exchange
Offer in the pro forma statements or capitalization tables.
The net proceeds from the issuance of the Initial Notes were used to
consummate the Redemption and to repay borrowings under the Company's revolving
credit facilities.
17
<PAGE> 24
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of June 30, 1997. The information presented below should be read
in conjunction with the financial statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
(IN MILLIONS)
<S> <C>
Current maturities of long-term debt........................ $ 11.0
-------
Long-term debt (less current maturities):
Credit Agreement and Trade Receivable Facility debt(1).... 43.0
Other senior debt......................................... 31.7
9 3/4% Senior Notes due 2007.............................. 225.0
12 3/4% Senior Subordinated Discount Debentures due
2005................................................... 404.3
-------
Total long-term debt................................. 704.0
-------
Stockholders' equity:
Class A Common Stock...................................... --
Capital in excess of par value............................ 174.7
Retained deficit(2)....................................... (101.9)
Common stock in treasury-at cost.......................... (11.5)
Recognition of minimum pension liability.................. (1.2)
-------
Total stockholders' equity........................... 60.1
-------
Total capitalization................................. $ 775.1
=======
</TABLE>
- -------------------------
(1) At June 30, 1997, the Company had $43.0 million of outstanding borrowings
under its Trade Receivable Facility, approximately $11.3 million of undrawn
letters of credit issued under the Credit Agreement and approximately $173.2
million of credit available under the revolving portions of the credit
facilities.
(2) The Refinancing resulted in an extraordinary loss of approximately $7.7
million, net of an income tax benefit of $5.0 million.
18
<PAGE> 25
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected historical consolidated financial data of the
Company for the years ended September 30, 1992, 1993, 1994, 1995 and 1996 (other
than operating data) were derived from the historical audited consolidated
financial statements of the Company. The following selected historical
consolidated financial data of the Company as of June 30, 1997 and for the nine
months ended June 30, 1996 and 1997 were derived from unaudited consolidated
financial statements of the Company, which, in the opinion of the Company,
reflect all adjustments necessary for a fair presentation of the results for the
unaudited periods. The following selected unaudited pro forma consolidated
income statement and other data have been prepared to give effect to the
Refinancing as if such transaction occurred on October 1, 1995.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30,(1) ENDED JUNE 30,
---------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996(2) 1996 1997 1997(2)
---- ---- ---- ---- ---- --------- ---- ---- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................ $ 722.8 $733.5 $784.4 $1,051.4 $ 922.0 $ 922.0 $698.6 $577.4 $577.4
Gross margin......................... 114.4 81.4 93.0 296.4 205.8 205.8 163.8 43.1 43.1
Selling and administrative costs..... (77.0) (73.8) (81.0) (95.5) (99.1) (99.1) (71.4) (61.5) (61.5)
Non-recurring charges................ (58.9) (9.9) (15.5) (5.4) (8.1) (8.1) -- -- --
Operating earnings (loss)............ (21.5) (2.3) (3.5) 195.5 98.6 98.6 92.4 (18.4) (18.4)
Interest expense -- net.............. (110.8) (68.2) (80.3) (86.1) (78.3) (79.5) (57.9) (60.0) (60.6)
Income (loss) before income taxes.... (132.5) (70.0) (84.0) 110.0 20.1 18.9 34.8 (79.2) (79.8)
Income tax benefit (expense)......... -- -- -- 24.2 (8.3) (7.8) (14.4) 31.1 31.3
Income (loss) before extraordinary
item and accounting change......... (132.5) (70.0) (84.0) 134.2 11.8 11.1 20.4 (48.1) (48.5)
Extraordinary item and accounting
charge............................. -- 200.2 -- -- (3.2) (3.2) (2.6) (7.7) --
Net income (loss).................... (132.5) 130.2 (84.0) 134.2 8.6 7.9 17.8 (55.8) (48.5)
Earnings per share:
Income (loss) before extraordinary
item and accounting change....... (8.54) (1.40) (1.57) 2.44 0.22 0.20 0.37 (0.91) (0.91)
Extraordinary item and accounting
change........................... -- 4.01 -- -- (0.06) (0.06) (0.05) (0.15) --
Net income (loss).................. (8.54) 2.61 (1.57) 2.44 0.16 0.14 0.32 (1.06) (0.91)
Cash dividends per share............. -- -- -- -- -- -- --
Weighted average shares
outstanding........................ 15.5 49.8 53.6 55.1 54.7 54.7 55.1 52.8 52.8
Ratio of earnings to fixed
charges(3)......................... -- -- -- 2.2x 1.2x 1.2x 1.6x -- --
Deficit of earnings to fixed
charges(3)......................... 133.0 70.5 84.9 -- -- -- -- 79.9 80.5
OTHER DATA:
Net cash provided by (used for)
operations......................... $ 56.6 $ 13.0 $ 29.7 $ 194.2 $ 164.4 $118.4 $(72.6)
Net cash used for investments........ (24.4) (29.3) (34.9) (61.3) (53.5) (38.1) (23.7)
Net cash provided by (used for)
financing.......................... (7.1) (20.6) (5.0) (117.8) (104.2) (80.4) 64.0
Depreciation and amortization(4)..... 59.3 61.1 61.2 64.8 64.5 48.6 49.1
Capital expenditures................. 22.9 23.7 40.4 58.9 54.8 39.4 22.8
EBITDA(4)............................ 91.9 63.9 69.6 260.4 167.9 138.6 28.3
Ratio of EBITDA to interest expense
-- net............................. 0.8x 0.9x 0.9x 3.0x 2.1x 2.4x 0.5x
OPERATING DATA:
Production:
Containerboard (thousand tons)..... 1,087.3 1,151.9 1,194.9 1,200.5 1,243.3 884.5 936.9
Unbleached kraft paper (thousand
tons)............................ 227.4 241.1 250.7 263.9 256.9 187.4 205.2
Shipments:...........................
Corrugated containers (billion
square feet)..................... 10.3 11.9 12.7 12.3 13.3 9.5 10.1
Multiwall bags (thousand tons)..... 44.1 48.7 51.5 52.4 51.9 37.2 43.0
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 131.0 $ 99.9 $ 71.6 $156.4 $ 69.8 $ 85.3
Property -- net........................................... 637.5 611.1 592.9 640.0 612.3 590.5
Total assets.............................................. 901.7 860.1 843.1 988.0 933.0 913.0
Long-term debt............................................ 28.5 670.1 696.8 671.5 623.1 704.0
Stockholders' equity (deficit)............................ (155.7) 53.6 (23.8) 113.2 114.5 60.1
</TABLE>
19
<PAGE> 26
- -------------------------
(1) The Company operates on a 52/53 week fiscal year. Fiscal 1992 through fiscal
1995 were 52-week years and fiscal 1996 was a 53-week year. Certain
information under Other Data has been reclassified to conform with the
current year presentation.
(2) The summary unaudited pro forma consolidated income statement and other data
have been prepared to give effect to the issuance of $225 million principal
amount of the Company's 9 3/4% Senior Notes due 2007 and the redemption of
$179.7 million principal amount of the Company's 11 1/2% Senior Notes due
2001 as if such transaction occurred on October 1, 1995. Pro forma interest
expense for the year ended September 30, 1996 and the nine months ended June
30, 1997 has been increased by the interest expense relating to the Notes
($22.5 million and $15.7 million, respectively, including amortization of
deferred financing costs) and reduced by the interest expense relating to
the Old Notes ($21.3 million and $15.1 million, respectively, including
amortization of deferred financing costs). The Pro Forma interest expense
has not been adjusted to reflect the effect of the repayment of borrowings
under the Company's revolving credit facilities (which would on a pro forma
basis have amounted to $0.5 million for the year ended September 30, 1996
and $0.8 million for the nine months ended June 30, 1997) or the investment
of excess cash available after the repayment. Accordingly, interest expense
-- net would have been lower. The redemption premium (approximately $8.9
million) and write-off of deferred financing fees associated with the Old
Notes, together with certain other items, resulted in an extraordinary loss
of approximately $7.7 million which is net of an income tax benefit of $5.0
million. The loss, which is not reflected in the pro forma income statement
data, was recognized in the third quarter of fiscal 1997.
(3) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary item, interest expense, taxes and one-third of
rent expense by the sum of interest expense and one-third of rent expense.
For the years ended September 30, 1992, 1993, and 1994 and the nine months
ended June 30, 1997, earnings before fixed charges were insufficient to
cover fixed charges by $133.0 million, $70.5 million, $84.9 million and
$79.9 million, respectively. On a pro forma basis for the nine months ended
June 30, 1997, earnings before fixed charges were insufficient to cover
fixed charges by $80.5 million.
(4) "EBITDA" represents, for any relevant period, the sum of operating earnings,
depreciation of property, plant and equipment, amortization of intangible
assets included in operating earnings and non-recurring charges. The amounts
shown for depreciation and amortization include $4.8 million, $4.8 million,
$3.6 million, $5.3 million, $3.3 million, $2.4 million and $2.4 million of
amortization of deferred financing costs included in interest expense for
fiscal 1992, fiscal 1993, fiscal 1994, fiscal 1995, fiscal 1996 and for the
nine months ended June 30, 1996 and 1997, respectively. EBITDA is not a
measure of financial performance under generally accepted accounting
principles, should not be construed as an alternative to operating income
(as determined in accordance with generally accepted accounting principles)
or to cash flows from operating activities (as determined in accordance with
generally accepted accounting principles), and does not necessarily indicate
that cash flow will be sufficient to fund cash requirements. The Company
understands that certain investors believe that EBITDA provides useful
information regarding the Company's ability to service debt and to utilize
cash for other purposes. EBITDA should not be considered in isolation or as
a substitute for net income, cash flows from operations, or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's operating performance,
profitability or liquidity. In addition, EBITDA may not be comparable to
other similarly titled measures of other companies.
20
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Demand for corrugated containers, containerboard and unbleached kraft paper
is cyclical and has historically corresponded to changes in the rate of growth
in the U.S. economy and exchange rates for the U.S. dollar. Growth in the U.S.
economy generally stimulates demand for packaging products. In addition,
weakness of the U.S. dollar versus the currencies of the United States' major
trading partners stimulates domestic demand for corrugated products and makes
export sales of containerboard more price competitive.
The cyclicality of demand is accentuated by the inelasticity of supply due
to the capital intensive nature of the industry. Because productive capacity
cannot be added quickly, during periods of rising demand containerboard and
unbleached kraft paper inventory levels tend to fall, exerting upward pressure
on prices. In periods when capacity exceeds demand, efforts to control inventory
levels are limited because containerboard and unbleached kraft paper mills
operate most economically near capacity operating levels.
Demand for unbleached kraft paper has declined in recent years due to
displacement by plastics. The Company can vary its production of unbleached
kraft paper, depending on market conditions, because all four of the Company's
paper machines that produce unbleached kraft paper also have the capability to
produce containerboard.
During the cyclical downturn ending in the fall of 1993, published
linerboard and grocery sack paper transaction prices declined approximately 27%
and 34%, respectively. Published prices for linerboard and grocery sack paper
recovered significantly throughout fiscal 1994 and fiscal 1995, increasing
approximately 80% and 84%, respectively, and reaching record highs. Increases in
industry containerboard capacity and softening demand for corrugated containers
contributed to a decrease of approximately 40% in published prices for
linerboard between September 1995 and March 1997. In addition, during the same
period published prices for grocery sack paper declined approximately 20%.
FIRST NINE MONTHS OF FISCAL 1997 COMPARED WITH FIRST NINE MONTHS OF FISCAL 1996
Net sales for the first nine months of fiscal 1997 were $577.4 million, a
decrease of approximately 17 percent compared with net sales of $698.6 million
for the first nine months of fiscal 1996. The operating loss for the current
period was $18.4 million compared with operating earnings of $92.4 million for
the year-ago period. The net loss for the current period totaled $55.8 million,
or $1.06 per share, and includes an extraordinary loss of $7.7 million ($0.15
per share) on the early retirement of debt, compared with net income of $17.8
million, or $0.32 per share (including a $2.6 million extraordinary loss ($0.05
per share) on the early retirement of debt), for the year-ago period.
Lower average selling prices for the Company's products for the first nine
months of fiscal 1997 resulted in a decrease in net sales of approximately $112
million. In addition, net sales were adversely affected by approximately $56
million as a result of the exchange of the Company's grocery bag manufacturing
net assets for a 35 percent equity interest in S&G Packaging Company L.L.C.
("S&G Packaging"), a joint venture with Stone Container Corporation in the
fourth quarter of fiscal 1996. Average selling prices for the Company's domestic
linerboard, export linerboard and corrugated products decreased approximately 26
percent, 20 percent and 22 percent, respectively, in the first nine months of
fiscal 1997 compared with the comparable prior-year period. Average selling
prices for the Company's unbleached kraft paper and multiwall bags decreased
approximately 18 percent and 6 percent, respectively, in the first nine months
of fiscal 1997 compared with the year-ago period.
Sales and earnings in the first nine months of fiscal 1997 were favorably
affected by higher mill production and converted product shipments. Higher
volume increased net sales by approximately $46 million.
Total mill production in the first nine months of fiscal 1997 of 4,184 tons
per day ("TPD," calculated on the basis of the number of days in the period)
increased approximately 7 percent from 3,928 TPD in the year-ago period.
Containerboard production in the first nine months of fiscal 1997 of 3,432 TPD
increased
21
<PAGE> 28
approximately 6 percent from 3,241 TPD in the prior-year period. Unbleached
kraft paper production in the current period increased approximately 9 percent
to 752 TPD from 687 TPD in the prior-year period. This favorable volume variance
is primarily due to an estimated 82 thousand tons of production "lost" primarily
due to market related down time taken during the first nine months of fiscal
1996, compared with an estimated 20 thousand tons of "lost" production during
the first nine months of fiscal 1997.
Corrugated shipments of approximately 10.1 billion square feet increased
approximately 6 percent in the first nine months of fiscal 1997 compared with
9.5 billion square feet shipped in the year-ago period. Multiwall bag shipments
increased to 43.0 thousand tons in the current period compared with shipments of
37.2 thousand tons in the first nine months of fiscal 1996.
Gross margin for the first nine months of fiscal 1997 decreased to $43.1
million from $163.8 million in the prior-year period primarily due to lower
selling prices for the Company's products. Lower average net selling prices,
including the effect of higher containerboard and unbleached kraft paper costs
on the Company's converting facilities ($10 million) reduced gross margin by
approximately $122 million. In addition, gross margin was adversely affected by
higher costs for fiber ($7 million), energy ($6 million) and labor ($5 million).
These unfavorable variances were partially offset by increased volume which
increased gross margin by approximately $27 million.
Selling and administrative costs of $61.5 million for the current period
decreased from $71.4 million in the prior-year period. The favorable comparison
in selling and administrative costs is primarily due to the exchange of the
Company's grocery bag and sack manufacturing assets for a 35 percent equity
interest in S&G Packaging. Net interest expense increased from the prior-year
period by $2.1 million to $60.0 million in the first nine months of fiscal 1997
as a result of higher average debt levels.
In the first nine months of 1997, the Company recorded a tax benefit of
$31.1 million which corresponds to an effective tax rate of approximately 39
percent. In the first nine months of fiscal 1996, the Company recorded a tax
provision of $14.4 million which corresponds to an effective rate of
approximately 41 percent.
During the third quarter of 1997, the Company issued the New Notes and used
the proceeds to redeem and retire all its outstanding Old Notes and to repay
borrowings under the revolving portion of its credit facilities. In conjunction
with the redemption, approximately $2.8 million of deferred financing fees were
written off. The early retirement of debt resulted in an extraordinary loss of
$7.7 million, net of an income tax benefit of $5.0 million.
During the first quarter of fiscal 1996, the Company repurchased and
retired approximately $65.3 million principal amount of its publicly traded debt
securities. In conjunction with the repurchase, approximately $1.4 million of
deferred financing fees were written off. The early retirement of debt resulted
in an extraordinary loss of $2.6 million, net of an income tax benefit of $1.8
million.
YEAR ENDED SEPTEMBER 30, 1996 (FISCAL 1996) COMPARED WITH YEAR ENDED SEPTEMBER
30, 1995 (FISCAL 1995)
Net sales for fiscal 1996 were $922.0 million, a decrease of approximately
12% compared with record net sales of $1,051.4 million for fiscal 1995.
Operating earnings for fiscal 1996 were $98.6 million compared with record
operating earnings of $195.5 million for fiscal 1995 after non-recurring
operating charges of $8.1 million and $5.4 million in fiscal 1996 and fiscal
1995, respectively. Net income was $8.6 million, or $0.16 per share, after a
$3.2 million extraordinary loss ($0.06 per share) on the early retirement of
debt, versus net income in fiscal 1995 of $134.2 million, or $2.44 per share,
including a $24.2 million income tax benefit.
Sales in fiscal 1996 were adversely affected by declining product prices
which resulted in significantly lower average selling prices for the Company's
products compared with fiscal 1995. Lower average selling prices decreased net
sales by approximately $181 million versus the prior fiscal year. Average
selling prices for the Company's domestic linerboard, export linerboard and
corrugated products decreased approximately 19%, 33% and 10%, respectively, in
fiscal 1996 compared with fiscal 1995. Average selling prices for the Company's
unbleached kraft paper and multiwall bags decreased approximately 25% and 1%,
respectively, in fiscal 1996 versus the prior year.
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Sales for fiscal 1996 benefited from record mill production. Increased
volume had a favorable effect on net sales of approximately $49 million. Total
mill production increased approximately 2% in fiscal 1996 compared with the
prior year. Production in fiscal 1996 benefited from an extra week in the fiscal
year. Adjusting for the extra week in fiscal 1996, production was marginally
higher despite approximately 80,000 tons of "lost" production primarily due to
market downtime. In fiscal 1996, production of linerboard increased
approximately 2% to 3,351 TPD from 3,298 TPD while production of unbleached
kraft paper decreased approximately 4% to 693 TPD from 725 TPD in the prior
year.
Corrugated shipments were a record 13.3 billion square feet in fiscal 1996,
an increase of approximately 8% from fiscal 1995. Adjusting for the extra week,
corrugated shipments increased approximately 6% due to shipments from a new
sheet feeder plant and capacity additions related to the capital investment
program. Multiwall bag shipments of 51,900 tons in fiscal 1996 were
approximately equal to the prior year. Prior to contributing its grocery bag
manufacturing assets to S&G Packaging the Company shipped (for the 9 1/2-month
period) 88,200 tons of grocery bags and sacks versus 105,000 tons in fiscal
1995.
Gross margin for fiscal 1996 decreased to $205.8 million from $296.4
million in the prior-year primarily due to lower selling prices for the
Company's products. Lower average net selling prices, net of the effect of lower
containerboard and unbleached kraft paper costs on the Company's converting
operations ($30 million), reduced gross margin by approximately $151 million.
The effect of lower selling prices was partially offset by reduced fiber costs
(primarily the cost of old corrugated containers ("OCC")) and increased volume
which favorably affected gross margin by approximately $72 million and $8
million, respectively.
In the fourth quarter of fiscal 1996, the Company recorded a $8.1 million
pre-tax charge for costs associated with a staff reduction program. The staff
reductions, which eliminated approximately 8 percent of the Company's salaried
positions, will reduce future administrative and overhead costs. In fiscal 1995,
the Company recorded a $5.4 million non-recurring charge for costs associated
with an early retirement option accepted by certain hourly employees at the
Antioch, California mill, which will reduce future unit labor costs.
Selling and administrative costs for fiscal 1996 were $3.6 million higher
than fiscal 1995. The increase is primarily the result of increased professional
fees and group insurance costs, partially offset by a decrease in incentive
compensation as a result of reduced profitability.
Net interest expense decreased to $78.3 million in fiscal 1996 from $86.1
million in fiscal 1995. The decrease was primarily due to lower average debt
levels, partially offset by accretion in the discount on subordinated debt.
During fiscal 1996, the Company repurchased and retired $75.2 million
principal amount of its publicly traded debt securities. In conjunction with the
repurchase, $1.5 million of deferred financing fees were written off. These
transactions resulted in an extraordinary loss of $3.2 million, net of an income
tax benefit of $2.3 million.
YEAR ENDED SEPTEMBER 30, 1995 (FISCAL 1995) COMPARED WITH YEAR ENDED SEPTEMBER
30, 1994 (FISCAL 1994)
Net sales for fiscal 1995 were a record $1,051.4 million, an increase of
approximately 34% compared with net sales of $784.4 million for fiscal 1994.
Operating earnings for fiscal 1995 were a record $195.5 million compared with an
operating loss of $3.5 million for fiscal 1994 after $5.4 million and $15.5
million of non-recurring operating charges in fiscal 1995 and fiscal 1994,
respectively. Net income was a record $134.2 million, or $2.44 per share,
including a $24.2 million income tax benefit, versus a net loss in fiscal 1994
of $84.0 million, or $1.57 per share.
Sales in fiscal 1995 benefited from a series of product price increases
resulting in significantly higher average selling prices for the Company's
products compared with fiscal 1994. Higher average selling prices increased net
sales by approximately $296 million versus the prior fiscal year. Average
selling prices for the Company's domestic linerboard, export linerboard and
corrugated products increased approximately 43%, 84% and 30%, respectively, in
fiscal 1995 compared with fiscal 1994. Average selling prices for the Company's
unbleached kraft paper, grocery bags and sacks and multiwall bags increased
approximately 41%, 72% and 8%, respectively, in fiscal 1995 versus the prior
year.
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The Company achieved record mill production in Fiscal 1995. The increase in
production was accomplished despite the temporary idling of the Bogalusa,
Louisiana and Antioch, California mills in the fourth quarter of fiscal 1995 to
avoid a build-up of inventories, which resulted in approximately 35,000 tons of
"lost" production. In addition, extended down time at the Bogalusa mill in the
first quarter of fiscal 1995 to install a new extended nip press resulted in
approximately 10,000 tons of "lost" production. Total mill production increased
approximately 1% in fiscal 1995 compared with the prior year. In fiscal 1995,
production of linerboard increased slightly to 3,298 TPD from 3,282 TPD while
production of unbleached kraft paper increased approximately 5% to 725 TPD from
689 TPD in the prior year.
Net sales were adversely affected by the sale or closure of two corrugated
plants in fiscal 1994 that had sales of approximately $26 million. Corrugated
shipments of 12.3 billion square feet for fiscal 1995 were approximately 3%
lower than fiscal 1994; however, shipments for fiscal 1994 include production
from two corrugated container plants that were subsequently sold or closed.
Adjusting for the prior-year shipments from these two plants, corrugated
shipments increased approximately 1% year over year. Multiwall bag shipments of
52,400 tons in fiscal 1995 were approximately 2% higher than the prior year.
Grocery bag and sack shipments were 105,000 tons, a decrease of approximately
10% versus shipments of 116,500 tons in fiscal 1994. The decline in shipments in
fiscal 1995 was primarily due to reduced demand for standard grocery sacks as a
result of greater displacement by plastic bags as prices for grocery sacks
increased, partially offset by increased shipments of Gaylord Handle-Bags(R).
Gross margin for fiscal 1995 increased to $296.4 million from $93.0 million
in the prior year primarily due to higher selling prices for the Company's
products. Significantly higher average net selling prices, net of the effect of
higher containerboard and unbleached kraft paper costs on the Company's
converting operations ($17 million), increased gross margin by approximately
$279 million. The effect of higher selling prices was partially offset by
increased fiber costs (primarily the cost of OCC) which reduced gross margin by
approximately $65 million. Year-over-year, average OCC prices increased
approximately 78% in fiscal 1995. In addition, gross margin was adversely
affected by higher labor costs for incentive programs tied to improved
profitability (approximately $7 million) and general inflation of other
manufacturing costs.
In the fourth quarter of fiscal 1995, the Company recorded a $5.4 million
non-recurring charge for costs associated with an early retirement option
accepted by certain hourly employees at the Antioch, California mill, which will
reduce future unit labor costs. In fiscal 1994, the Company recorded
non-recurring operating charges of (i) $9.9 million for asset write-downs and
other costs associated with the relocation of three converting facilities, (ii)
$3.5 million for costs associated with the closure of a corrugated container
plant and (iii) $2.1 million for a loss on sale and costs associated with the
disposition of a corrugated container plant.
Selling and administrative costs for fiscal 1995 were $14.5 million higher
than fiscal 1994. The increase is primarily the result of higher incentive
compensation costs related to improved profitability.
Net interest expense increased to $86.1 million in fiscal 1995 from $80.3
million in fiscal 1994. The increase was primarily due to higher accretion of
the discount on subordinated debt of $5.4 million.
In the fourth quarter of fiscal 1995, the Company recorded a $28.0 million
income tax benefit primarily due to the recognition of tax benefits about which
substantial doubt as to their realization had previously existed. In general,
the Company has regular and Alternative Minimum Tax ("AMT") operating loss
carryforwards that exceed its earnings for fiscal 1995. The Company recorded a
current tax provision of $3.8 million in fiscal 1995 primarily because Internal
Revenue Service regulations limit the use of AMT operating loss carryforwards to
90% of AMT income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through cash provided
by operations, borrowings under its credit agreements and the issuance of debt
and equity securities. The Company's principal uses of cash are to pay operating
expenses, fund capital expenditures and service debt.
Net cash provided by operations for fiscal 1996 was $164.4 million compared
with $194.2 million for the prior year. The unfavorable comparison to fiscal
1995 was due to significantly lower selling prices for the
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<PAGE> 31
Company's products. Net cash used for operations for the first nine months of
fiscal 1997 was $72.6 million, compared with net cash provided by operations of
$118.4 million for the year-ago period. The unfavorable comparison to the
prior-year period was primarily due to reduced earnings and the first
semi-annual interest payment in November 1996 on the Company's 12 3/4%
Debentures, on which interest had previously been accreting.
At June 30, 1997, the Company had primary working capital of $85.3 million,
an increase of $15.5 million from September 30, 1996 primarily due to the timing
of the semi-annual interest payments on the Company's publicly traded debt
securities, partially offset by lower accounts receivable. The decrease in
accounts receivable was primarily due to lower average net selling prices for
all of the Company's products.
In fiscal 1994, the Company initiated a five-year capital plan that
provides a total investment of approximately $250 million. The plan targets
approximately 60 percent of the capital spending to enhance the capacity,
flexibility and cost effectiveness of the Company's converting facilities with
the remainder to be invested in its paper mills. Capital expenditures were $54.8
million, $58.9 million and $40.4 million in fiscal 1996, fiscal 1995 and fiscal
1994, respectively. In addition to the capital spending, the Company acquired
$5.6 million, $45.1 million and $8.4 million of equipment financed by capital
leases and debt obligations secured by the assets acquired in fiscal 1996,
fiscal 1995 and fiscal 1994, respectively. Capital expenditures of $22.8 million
in the first nine months of fiscal 1997 decreased by $16.6 million from $39.4
million in the first nine months of fiscal 1996. The Company has slowed its
capital spending in response to unfavorable industry conditions. The Company's
future capital plans will continue to emphasize its operating strategy of being
a low-cost, high-quality producer of linerboard, unbleached kraft paper and
related products. See "The Company -- Operating Strategy." The amount of
spending in any given year will depend upon business conditions at such time.
In fiscal 1992, the Company determined it would be unlikely that its
Antioch, California virgin fiber mill (the "East Mill"), which was closed in
fiscal 1991, could be sold as a mill site or that the East Mill, or some portion
thereof, could be operated economically by the Company. For the first nine
months of fiscal 1997, East Mill related costs exceeded proceeds from asset
disposals by approximately $1.3 million. At June 30, 1997, balance sheet
valuation allowances for demolition and asbestos removal were approximately $0.6
million and $15.3 million, respectively, and the net carrying value of the East
Mill was $1.9 million.
In the fourth quarter of fiscal 1996, the Company recognized a $8.1 million
pre-tax charge primarily for enhanced retirement benefits and post-retirement
medical costs, and severance payments associated with a staff reduction program.
In fiscal 1997, the Company charged approximately $1.2 million of severance
costs to balance sheet accruals. At June 30, 1997, the Company had remaining
balance sheet accruals for severance payments of approximately $0.6 million and
anticipates making substantially all of such payments by September 1997. In
addition, the Company has remaining balance sheet accruals of approximately $1.7
million for non-recurring operating charges (primarily lease termination costs)
recognized prior to fiscal 1995. The Company anticipates incurring such costs
over the next six months.
At June 30, 1997, the Company had cash and equivalents of $6.9 million, a
decrease of $32.3 million from September 30, 1996, as cash used for operations
and investments exceeded cash provided by financing. In the third quarter of
fiscal 1997, the Company issued the New Notes and used the proceeds to redeem
and retire all its outstanding Old Notes and to repay borrowings under the
revolving portion of its credit facilities. Total debt increased by $80.6
million to $715.0 million at June 30, 1997 from $634.4 million at September 30,
1996 as a result of revolver borrowings and the issuance of the New Notes. At
June 30, 1997, the Company had $43 million of borrowings outstanding and
approximately $173 million of credit available under the revolving portions of
its credit agreements. The Company amended its bank credit agreement to allow
the issuance of the New Notes and modify the financial covenants to allow the
Company greater financial flexibility.
The Company is currently implementing a linerboard price increase of $40
per ton effective with orders entered for shipment on or after July 1, 1997 and
has announced a box price increase of 12 percent effective on July 28, 1997.
There can be no assurance, however, that this or any other price increase will
be realized.
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The Company's average delivered price for OCC has increased steadily during
fiscal 1997 and current indications are that this will continue into the fourth
fiscal quarter. The Company's average delivered cost of OCC increased
approximately 14 percent in the third quarter of fiscal 1997 compared with the
third quarter of fiscal 1996. Current prices are more than 30 percent higher
than average prices for the June 1997 quarter. The secondary fiber market,
however, is difficult to predict, and there can be no assurance of the direction
OCC prices will take in the future.
Assuming current fiber costs, maintenance levels of capital spending, and
an increase of at least $50 per ton in primary product prices from June levels
(and passed through to converted product prices) by the fourth quarter of fiscal
1998, the Company believes that cash provided by operations, and amounts
available under its credit agreements will provide adequate liquidity to meet
its debt service obligations and other liquidity requirements over the next 12
to 24 months. However, unless there is significant product price improvement
beginning in the fall of this year, the Company will seek additional covenant
modifications to the Credit Agreement to maintain continuing access to its
liquidity.
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL
RESULTS COULD DIFFER MATERIALLY. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE
NOT LIMITED TO, GENERAL ECONOMIC AND BUSINESS CONDITIONS, COMPETITIVE MARKET
PRICING, INCREASES IN RAW MATERIAL, ENERGY AND OTHER MANUFACTURING COSTS,
FLUCTUATIONS IN DEMAND FOR THE COMPANY'S PRODUCTS, POTENTIAL EQUIPMENT
MALFUNCTIONS AND PENDING LITIGATION.
PENDING ACCOUNTING STANDARD
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" which simplifies
the computation of earnings per share. The statement is effective for financial
statements issued for periods ending after December 15, 1997. The statement will
be adopted in fiscal 1998 and will not impact the Company's results of
operations, financial position or cash flows or have a material impact on its
earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income and its
components in financial statements. The statement is effective for fiscal years
beginning after December 15, 1997. The statement will be adopted in fiscal 1999
and will not impact the results of operations, financial position or cash flows
of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which changes the way public companies
report information about segments of their business. The statement is effective
for fiscal years beginning after December 15, 1997. The statement will be
adopted in fiscal 1999 and will not impact the results of operations, financial
position or cash flows of the Company.
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BUSINESS
HISTORY
The Company acquired businesses which had been owned by Crown Zellerbach
Corporation on November 17, 1986 for approximately $260 million. Since its
inception, the Company has expanded its business through strategic acquisitions
and capital investments. The Company financed the acquisitions and capital
expenditures with cash provided by operations, borrowings under its credit
agreements and the issuance of debt and equity securities. The Company's
facilities currently consist of three containerboard and unbleached kraft paper
mills, 14 corrugated container plants, three corrugated sheet feeder plants, two
multiwall bag plants, a preprint and graphics center, a cogeneration facility
and through a wholly owned, independently operated subsidiary, a specialty
chemicals facility.
In September 1992, the Company filed a voluntary petition for relief and a
plan of reorganization (the "Prepackaged Plan") under Chapter 11 of the United
States Bankruptcy Code. In November 1992, the Prepackaged Plan was consummated.
In fiscal 1994, the Company initiated a five-year capital plan that
provides for a total investment of approximately $250 million. The plan targets
approximately 60% of the capital spending to enhance the capacity, flexibility
and cost effectiveness of the Company's converting facilities with the remainder
to be invested in its paper mills. In fiscal 1995, as part of the capital plan,
the Company opened one new converting plant and relocated or expanded three
converting plants.
On July 12, 1996, the Company contributed its grocery bag manufacturing net
assets to S&G Packaging, a joint venture with Stone Container Corporation, in
exchange for a 35% equity interest in the new company. The Company has the
option to purchase an additional 15% interest prior to the fifth anniversary of
the joint venture.
GENERAL
Corrugated containers are a safe and economical way to transport
manufactured and bulk goods. Increasingly, corrugated containers are also used
as integrated transportation and marketing devices in the form of point-of-sale
displays. The major corrugated container end-use markets are food, beverage and
agricultural products; paper and fiber products; petroleum, petrochemical
resins, plastics and rubber products; glass and metal containers; electronic
appliances; and electrical and other machinery. Most corrugated containers are
produced and sold according to individual customer specifications.
Containerboard, consisting of linerboard and corrugating medium, is the
principal raw material used in the manufacture of corrugated containers.
Linerboard provides the strength component of a container while corrugating
medium provides rigidity. Corrugating medium is fluted and laminated to
linerboard in corrugated container and corrugated sheet feeder plants to produce
corrugated sheets. The sheets are subsequently printed, cut, folded and glued in
corrugated container or corrugated sheet plants to produce corrugated
containers.
Generally, corrugated containers are delivered by truck because of the
large number of customers and demand for timely service. The dispersion of
customers and the high bulk, low density and value of corrugated containers make
shipping costs a relatively high percentage of total costs. As a result,
corrugated container plants tend to be located close to customers to minimize
freight costs.
To reduce the cost of shipping containerboard from mills to widely
dispersed corrugated plants, vertically integrated containerboard manufacturers
routinely exchange containerboard from mills in one location for containerboard
having a similar value from mills located elsewhere in the United States.
Producers also exchange containerboard to take advantage of manufacturing
efficiencies resulting from operating paper machines in their most efficient
basis weight ranges and trim widths and to obtain paper grades they do not
produce.
Unbleached kraft paper is the principal raw material used in the
manufacture of multiwall bags and grocery bags and sacks. Multiwall bags are
used by producers in such industries as pet food, chemical,
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<PAGE> 34
agricultural, food, metal, plastics and rubber. Multiwall bags and grocery bags
and sacks are manufactured through a process of printing, cutting, folding and
gluing kraft paper to meet customer specifications.
Cellulose fiber, produced from woodchips, is the principal raw material
used in the manufacture of containerboard and kraft paper. The industry's use of
recycled fiber, however, has been increasing. Fiber costs are generally the
largest cost component in the manufacture of containerboard and unbleached kraft
paper.
In calendar 1995, industry trade associations estimated U.S. corrugated
product sales and multiwall bag sales to be $23.4 billion and $1.3 billion,
respectively. It has also been estimated that virgin containerboard and
unbleached kraft paper capacity utilization rates in the United States averaged
95% and 76%, respectively, in calendar 1995 and 92% and 73%, respectively, for
the first nine months of calendar 1996.
Industry trade publications estimated that calendar year 1996 U.S.
containerboard and unbleached kraft paper annual capacities were 35.6 million
tons and 2.6 million tons, respectively. This represents an increase in
containerboard capacity of approximately 6% and a decrease in unbleached kraft
paper capacity of approximately 4%, compared with the prior year.
Demand for corrugated containers, containerboard and unbleached kraft paper
is affected by the level of growth of economic activity and, in the case of
containerboard, the strength of the U.S. dollar. For further information
regarding the industry and factors that influence prices and the demand for
paper packaging products, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
SALES
Corrugated containers and sheets, multiwall bags and solid fibre products
collectively represent approximately 85% of the Company's net sales while
containerboard and unbleached kraft paper represent approximately 15% of such
sales. Sales of the Company's products are not seasonal to any significant
degree.
The Company sells its products to thousands of customers, with the 10
largest accounting for approximately 16% of net sales in fiscal 1996 and 13% and
11%, respectively, in fiscal 1995 and fiscal 1994. The Company's largest
customer accounted for approximately 4% of the Company's net sales in fiscal
1996 and approximately 3% and 2%, respectively, in fiscal 1995 and fiscal 1994.
Corrugated containers are generally produced to customer order for delivery from
four to ten days after receipt of the order. As a result, the Company's backlog
generally does not exceed 3% of annual corrugated container sales at any
particular time.
In general, each converting facility has its own sales force that is
responsible for marketing and distribution to local customers. A national
account sales force handles converted product sales to large customers who
utilize centralized purchasing for multiple locations. In total, the Company's
sales force for converted products at September 30, 1996 consisted of
approximately 130 salespersons. Sales and exchanges of containerboard and
unbleached kraft paper are the responsibility of a small centralized marketing
and sales group.
The Company exports linerboard and unbleached kraft paper, certain
converted products and specialty chemicals. Such sales totaled $71.5 million,
$113.9 million and $45.7 million in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively. Fluctuations in export sales are primarily the result of changes
in selling prices for linerboard and unbleached kraft paper.
PRODUCTS
CORRUGATED PRODUCTS. The Company produces many varieties of corrugated
containers and sells the majority of its production to manufacturing end users.
Corrugated shipments were a record 13.3 billion square feet in fiscal 1996, an
increase of approximately 8% from the prior year. Shipments in fiscal 1996
benefited from an extra week in the fiscal year. Adjusting for the extra week,
corrugated shipments increased approximately 6% due to shipments from a new
sheet feeder plant and capacity additions related to the capital investment
program. From fiscal 1994 to fiscal 1995, corrugated shipments decreased
approximately 3%,
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primarily due to the sale or closing of two corrugated container plants during
fiscal 1994. Adjusting for the prior year shipments from these two plants,
corrugated shipments increased approximately 1% in fiscal 1995.
CONTAINERBOARD. The Company's containerboard mills in the aggregate have
the ability to manufacture containerboard in a broad spectrum of grades and
weights. Production of containerboard increased slightly to a record 1,243,300
tons in fiscal 1996 from 1,200,500 tons in the prior year. Adjusting for the
extra week in fiscal 1996, containerboard production increased approximately 2%
versus the prior year despite "losing" approximately 60,000 tons of production
primarily due to market-driven downtime. During fiscal 1995, the Company's
production of containerboard increased slightly from 1,194,900 tons in fiscal
1994. In addition to its own production, the Company has agreed to purchase, at
market prices, through 2004 approximately 24,000 tons per year of containerboard
from Newark Group Industries, Inc. During fiscal 1996, fiscal 1995 and fiscal
1994, the Company's corrugated plants consumed the equivalent of approximately
80%, 78% and 82%, respectively, of the Company's containerboard production and
purchase commitments.
MULTIWALL BAGS. The Company produces many varieties of medium to large
multiwall bags and sells them to manufacturers and processors for packaging
their products. The Company's multiwall bag shipments were essentially flat in
fiscal 1996. The Company's multiwall bag shipments increased to a record 52,400
tons in fiscal 1995, an increase of approximately 2% from 51,500 tons in fiscal
1994.
GROCERY BAGS AND SACKS. Prior to contributing its grocery bag manufacturing
assets to S&G Packaging in July 1996, the Company shipped (for the 9 1/2 month
period) approximately 88,200 tons of grocery bags and sacks. The Company shipped
approximately 105,000 tons of grocery bags and sacks in fiscal 1995, a decrease
of approximately 10% versus shipments of 116,500 tons in the prior year. The
decrease in shipments in fiscal 1995 was primarily due to reduced demand for
standard grocery sacks as a result of greater displacement by plastic bags as
prices for grocery sacks increased. This decline was partially offset by
increased shipments of Gaylord Handle-Bags.
UNBLEACHED KRAFT PAPER. The Company is a supplier of unbleached kraft paper
to independent multiwall bag and grocery bag and sack converters. During fiscal
1996, the Company produced 256,900 tons of unbleached kraft paper despite the
"loss" of approximately 20,000 tons primarily due to market-driven downtime.
This compares with 263,900 tons and 250,700 tons in fiscal 1995 and fiscal 1994,
respectively. In addition to its own production, the Company has agreed to
purchase approximately 35,000 tons per year of unbleached kraft paper from
Riverwood International U.S.A., Inc., through 1999. The Company has an agreement
to supply S&G Packaging with approximately 130,000 tons of unbleached kraft
paper per year. During fiscal 1996, the Company's multiwall bag and grocery bag
and sack plants consumed, or the Company sold pursuant to its paper supply
agreement, approximately 59% of its unbleached kraft paper production and
purchase commitments. During fiscal 1995 and fiscal 1994, the Company's
multiwall bag and grocery bag and sack plants consumed the equivalent of
approximately 54% and 58%, respectively, of the Company's unbleached kraft paper
production and purchase commitments.
SPECIALTY CHEMICALS. Gaylord Chemical Corporation ("Gaylord Chemical"), a
wholly owned, independently operated, subsidiary of the Company, utilizes a
process stream from the Bogalusa, Louisiana paper mill manufacturing operations
to produce dimethyl sulfide ("DMS") and dimethyl sulfoxide ("DMSO"). DMS is a
low boiling-point liquid used as a presulfiding agent for catalysts for the
petroleum industry, a natural gas odorant, a processing aid in ethylene
production and a feedstock for the manufacture of DMSO. DMSO is used as a
solvent for a wide range of complex manufacturing processes used in the
chemical, agricultural and pharmaceutical industries. Management believes that
Gaylord Chemical is the sole domestic producer of DMSO and estimates that
Gaylord Chemical produces 35% to 40% of the world's supply of DMSO. Sales of
these products for fiscal 1996, fiscal 1995 and fiscal 1994 were $18.2 million,
$16.7 million and $14.3 million, respectively.
OTHER PRODUCTS. At its Bogalusa, Louisiana corrugated container plant, the
Company produces solid fibre products which are primarily used as beverage
carriers and pallet substitutes. Solid fibre is produced using technology and
manufacturing processes similar to those used for corrugated containers.
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The Company operates a cogeneration facility at its Antioch, California
mill, which produces steam and electricity for the mill. Pursuant to a long-term
agreement, the Company sells a specified amount of electricity representing the
cogeneration facility's anticipated excess capacity at the contract date to
Pacific Gas & Electric Company, subject to certain adjustments. Electricity
sales pursuant to this agreement were $6.6 million in both fiscal 1996 and
fiscal 1995 and $8.5 million in fiscal 1994.
RAW MATERIALS
The Bogalusa, Louisiana mill uses approximately 75% pulpwood and woodchips
in the manufacture of containerboard and unbleached kraft paper, of which 40% to
45% was supplied by Weyerhaeuser Company ("Weyerhaeuser"), successor in interest
to Hanson Natural Resources Company, in the last three fiscal years and the
remainder was purchased on the open market. The Company has certain agreements
through 2016 pursuant to which Weyerhaeuser is committed to supply the Company
with significant quantities of wood chips, roundwood and stumpage at prices
based on independent market transactions and, through 1998, hog fuel (which
consists of bark and other residual fiber from trees) at prices derived from
prices of an alternative fuel. Recycled fiber accounts for the remainder of the
mill's fiber requirements.
The Antioch, California mill uses 100% recycled fiber. Approximately 80% of
the OCC used as a source of recycled fiber at the Antioch mill are supplied
under contracts with several suppliers at market prices. Upon expiration of such
contracts, the Company believes it will be able to negotiate new contracts with
these or other suppliers to provide significant quantities of OCC at market
prices. The remainder is purchased on the open market.
The Pine Bluff, Arkansas mill uses approximately 75% wood chips, of which
approximately 32%, 23% and 25% was supplied by Weyerhaeuser in fiscal 1996,
fiscal 1995 and fiscal 1994, respectively, with the remainder generally
purchased pursuant to annual contracts with a number of different chip suppliers
in the area. The contract with Weyerhaeuser provides for a supply of wood chips
at market prices through June 30, 1997, at which time it will be renegotiated.
Recycled fiber accounts for the remainder of the mill's fiber requirements.
During fiscal 1996, the Company's performance, as compared to fiscal 1995,
was favorably affected by lower fiber costs, primarily due to significant
decreases in OCC prices. From its peak of $230 per ton in May 1995 the delivered
cost of OCC dropped to approximately $95 per ton in September 1996. The
secondary fiber market, however, is difficult to predict, and there can be no
assurance of the direction future OCC prices will take. In fiscal 1996, fiber
represented approximately 40% of the Company's containerboard and unbleached
kraft paper production costs and future increases in fiber prices would
adversely affect the Company's profitability.
ENERGY
The Company's mills require significant amounts of steam and electricity in
their operation. The Company has a supply agreement through 1998 pursuant to
which Weyerhaeuser provides hog fuel for the production of steam at the Bogalusa
mill. In fiscal 1996, the Bogalusa mill produced all of its steam and generated
approximately 63% of its electricity requirements. During the same period, the
Antioch mill produced all of its steam and approximately 97% of its electricity.
The Antioch mill has a contract to sell electricity from its cogeneration
facility to a public utility through 2013. See "-- Products -- Other Products."
Certain aspects of the energy operations of the Bogalusa mill and the Antioch
mill are regulated by the Federal Energy Regulatory Commission. The Pine Bluff
mill produces all of its own steam, but purchases all of its electricity from a
local public utility.
In fiscal 1996, energy costs accounted for approximately 8% of the
Company's containerboard and unbleached kraft paper production costs and future
increases in energy prices would adversely affect the Company's profitability.
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COMPETITION
Many of the Company's competitors are substantially larger and have
significantly greater financial resources; however, the most important
competitive factors are price, quality and service. The manufacture of
containerboard and unbleached kraft paper is capital intensive with high
barriers to entry because new facilities require substantial capital and take at
least two years to construct. Many of the Company's larger competitors own
timberlands. Although the Company does not own timberlands, it has fiber supply
agreements described in "-- Raw Materials." Such agreements covered
approximately 40% of the Company's pulpwood and wood chip requirements in fiscal
1996.
In contrast to the containerboard and unbleached kraft paper segment of the
industry, the converting segment, which manufactures corrugated products and
multiwall bags, has comparatively low barriers to entry. Competition in
corrugated products and, to a lesser extent, multiwall bags, is primarily
localized, with proximity to customers an important factor in minimizing
shipping costs. There are a substantial number of competitors in each of the
geographic areas in which the Company's converting facilities are located. Many
of such competing facilities are owned by other integrated producers.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local environmental requirements,
particularly relating to air and water quality, waste disposal and the cleanup
of contaminated soil and groundwater, is a significant factor in the Company's
business. The Company made capital expenditures for environmental purposes of
approximately $4.3 million, $5.5 million and $2.3 million in fiscal 1996, fiscal
1995 and fiscal 1994, respectively, and the Company expects that capital
expenditures for environmental purposes for fiscal 1997 and fiscal 1998 will be
of the same order of magnitude as such prior fiscal years. The Company believes
that it is in compliance in all material respects with applicable federal, state
and local environmental regulations.
In December 1993, the Environmental Protection Agency (EPA) proposed
regulations implementing portions of the Clean Air Act of 1990 and the Clean
Water Act applicable to the pulp and paper industry known as the "cluster
rules." The EPA has indicated that significant changes to the regulations will
be considered prior to the adoption of the final regulations which are expected
to be issued in 1997, with compliance required within three years from that
date. The Company is evaluating the potential impact of the proposed rules on
its operations and capital expenditures over the next several years.
Preliminary estimates indicate that the Company could be required to make
capital expenditures of approximately $5 million to $7 million per year during
the three years following issuance to meet the requirements of the proposed
rules. The ultimate financial impact of the regulations cannot be predicted with
any reasonable certainty and will depend on several factors including the actual
requirements imposed under the final rules, new developments in control process
technology and cost inflation.
The Company has been identified as an alleged and de minimis potentially
responsible party ("PRP") for liability arising from offsite waste disposal by a
predecessor entity at three sites pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act or similar state laws. Although
liability for environmental remediation under these laws can be imposed on a
strict or joint and several basis, such liability is commonly allocated based
upon each PRP's volumetric contribution of waste. In light of the Company's
small volumetric contribution to the identified sites, and the active
involvement of other well-funded PRP's, the Company does not believe that its
liability at these sites, if any, will have a material adverse effect on its
business, financial condition, results of operations or cash flow. Because
liability under these laws is retroactive, it is possible that in the future the
Company may be identified as a PRP with respect to other sites.
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DESCRIPTION OF PROPERTIES
MANUFACTURING PROPERTIES. The Company's plants are maintained in generally
good condition and management believes they are suitable for their specific
purposes. Set forth below is certain information concerning these facilities:
<TABLE>
<CAPTION>
PLANT PRODUCTS OWNED/LEASED
----- -------- ------------
<S> <C> <C>
Mills:
Antioch, California........... Containerboard Owned
Bogalusa, Louisiana........... Containerboard and unbleached kraft paper Owned
Pine Bluff, Arkansas.......... Containerboard and unbleached kraft paper Owned
Corrugated Plants:
Antioch, California........... Corrugated containers Owned
Atlanta, Georgia.............. Corrugated containers Owned
Bogalusa, Louisiana........... Corrugated containers and solid fibre Owned
Carol Stream, Illinois........ Corrugated containers Owned
City of Industry,
California.................. Corrugated sheets Owned
Dallas, Texas................. Corrugated containers Leased
Gilroy, California............ Corrugated containers Leased
Greenville, South Carolina.... Corrugated containers Owned
Marion, Ohio.................. Corrugated containers Owned
Newark, Delaware.............. Corrugated containers Owned
Phoenix, Arizona.............. Corrugated containers Owned
Raleigh, North Carolina....... Corrugated containers Owned
St. Louis, Missouri........... Corrugated containers Owned
San Antonio, Texas............ Corrugated containers Leased
San Antonio, Texas............ Corrugated sheets Owned
Sunnyvale, California......... Corrugated sheets Owned
Tampa, Florida................ Corrugated containers Leased
Bag Plants:
Pine Bluff, Arkansas.......... Multiwall bags Owned
Twinsburg, Ohio............... Multiwall bags Leased
Other Facilities:
Antioch, California........... Electricity cogeneration Owned
Bogalusa, Louisiana........... Specialty chemicals Owned
Livermore, California......... Preprinted linerboard Leased
</TABLE>
The Bogalusa mill has five paper machines with the capacity to produce
linerboard, corrugating medium and unbleached kraft paper. The mill uses
softwood and hardwood pulp and recycled fiber from OCC and double lined kraft
("DLK") clippings.
The Antioch mill has one paper machine with the capacity to produce
recycled linerboard and corrugating medium using 100% recycled fiber.
The Pine Bluff mill has one paper machine with the capacity to produce
unbleached kraft paper and linerboard. The mill uses softwood pulp and recycled
fiber from DLK. See "Business -- Products."
OTHER PROPERTIES. The Company leases its executive and general and
administrative offices in Deerfield, Illinois. It also leases numerous warehouse
facilities and sales offices throughout the United States.
EMPLOYEES
At September 30, 1996, the Company employed approximately 3,900 people.
Approximately 62% of the Company's employees are hourly wage employees most of
whom are members of various labor unions. The Company's labor agreements
covering its employees at its Bogalusa, Antioch and Pine Bluff mills expire in
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fiscal 2000, fiscal 2001 and fiscal 2002, respectively. In conjunction with the
renegotiation of the Antioch mill's labor contract, in fiscal 1995 certain
hourly employees accepted an early retirement option, which was designed to
reduce future unit labor costs. In fiscal 1996, the Company instituted a staff
reduction program to reduce future administrative and overhead costs. The
program eliminated approximately 8% of the Company's salaried positions. At
September 30, 1996, labor contracts at five of the Company's manufacturing
facilities covering approximately 16% of the Company's union employees have
expired or are scheduled to expire before the end of fiscal 1997. The Company
believes it has satisfactory relations with its employees and their unions and,
based on previous experience, does not anticipate any significant difficulties
in renegotiating labor contracts as they expire.
LEGAL PROCEEDINGS
The Company and certain of its officers and directors have been named in a
civil suit filed in Cook County (Illinois) Circuit Court alleging that they
omitted or misrepresented facts about the Company's operations in connection
with the Company's initial public offering of stock in 1988 and in certain
periodic reports. The complaint, a purported class action, originally sought
unspecified damages under the Illinois Consumer Fraud and Deceptive Practices
Act and for common law fraud. On January 10, 1996, the court dismissed both
counts with prejudice, and plaintiff has appealed. A similar lawsuit, based on
the same factual allegations, but alleging violations of federal securities laws
and filed in the United States District Court for the Northern District of
Illinois, was voluntarily dismissed by the same plaintiff in July 1993. The
Company believes that, after investigation of the facts, the allegations in the
complaint are without merit, and the Company is vigorously defending itself.
On October 18 and December 4, 1995, the Company, its directors and certain
of its officers were named in complaints which have been consolidated in the
Court of Chancery of the state of Delaware alleging breach of fiduciary duties
on two counts. The first count is a putative class action and the second is an
alleged derivative claim brought on behalf of the Company against the individual
defendants. Both counts allege that the Company's stockholder Rights Agreement,
adopted on June 12, 1995, amendments to the Company's charter and by-laws,
adopted on July 21, 1995, and a redemption of Warrants in June 1995 all were
designed to entrench the individual defendants in their capacities as directors
and officers at the expense of stockholders who otherwise would have been able
to take advantage of a sale of the Company. The complaint asks the court, among
other things, to rescind the amendments and prohibit the use of the stockholder
Rights Agreement to discourage any bona fide acquirer. In the alternative, the
plaintiffs seek compensatory damages. On December 19, 1996, the Delaware
Chancery Court denied the Company's motion to dismiss the complaint in its
entirety. The case is now in the preliminary discovery stage. The Company
believes the allegations are without merit and is defending itself vigorously.
On October 23, 1995, a rail tank car exploded on the premises of the
Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a wholly owned,
independently operated subsidiary of the Company. The accident resulted in the
venting of certain chemicals, including by-products of nitrogen tetroxide, a raw
material used by the plant to produce dimethyl sulfoxide, a solvent used in the
manufacture of pharmaceutical and agricultural chemicals. More than 160 lawsuits
have been filed in both federal and state courts naming as defendants Gaylord
Chemical Corporation and/or the Company, certain of their respective officers
and other unrelated corporations and individuals. The lawsuits, which seek
unspecified damages, allege personal injury, property damage, economic loss,
related injuries and fear of injuries as a result of the accident. On April 1,
1996, the federal judge dismissed all but one of the federal actions for failing
to state claims under federal law and remanded the remaining tort cases to the
district court in Washington Parish, Louisiana, where they have been
consolidated. Discovery in the remaining federal action, a suit to recover
alleged clean-up costs, was ordered coordinated with the Louisiana State action.
On May 21, 1996 the Louisiana state court established a Plaintiff's Liaison
Committee ("PLC") to coordinate and oversee the consolidated cases on behalf of
plaintiffs. On June 26, 1996 the PLC and defendants agreed to a Case Management
Order ("CMO") that was subsequently entered by the Court. Pursuant to the CMO,
the plaintiffs filed a single Consolidated Master Petition against Gaylord
Chemical Corporation, the Company and twenty-one other defendants. In the
Consolidated Master Petition all claims
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<PAGE> 40
against the individual defendants (including the officers of Gaylord Chemical
Corporation and the Company) were dropped. Also, pursuant to the terms of the
CMO, all of the individual actions filed before the Consolidated Master Petition
have been, or are scheduled to be, dismissed. The Consolidated Master Petition
includes substantially all of the claims and theories asserted in the prior
lawsuits, including negligence and strict liability, as well as several claims
of statutory liability. Unspecified compensatory and punitive damages are
sought. The Company and its subsidiaries are vigorously contesting all of these
claims.
On July 15, 1996 the Louisiana state court certified these consolidated
actions as a single class action. The class was tentatively defined to include
all those persons or entities who claim to have been injured as a result of the
October 23, 1995 accident. On March 27, 1997, the Louisiana Court of Appeal for
the First Circuit reversed the trial court's order granting class certification,
defining the class, approving class notice, requiring all notice forms be
notarized and appointing the plaintiffs' attorneys to the PLC. The Court of
Appeal ordered the trial court to conduct a new class certification hearing to
allow additional evidence on the adequacy of class representatives and class
counsel and instructed the trial court to create a concise geographic definition
of the class of individuals allegedly impacted. Finally, the Court of Appeal
instructed the trial judge to approve a new class notice form that permits the
use of notice of claim forms and/or proof of claim forms only after a
determination of liability, if any. The Louisiana Supreme Court declined to
review that decision. On May 23, 1997, the trial court reappointed the PLC, and
on June 20, 1997 a second CMO was filed. A class certification hearing was held
on July 28, 1997. The issue was not resolved and the hearing has been scheduled
to continue on August 21, 1997.
In addition, the Company, its subsidiary and numerous other third party
companies have been named as defendants in eleven actions brought by plaintiffs
in Mississippi state court, who claim injury as a result of the October 23, 1995
accident at the Bogalusa facility. Included among these cases are two actions
which purport to be on behalf of over 9,000 individuals. These cases are not
filed as a class action but have been consolidated before a single judge in
Hinds County, Mississippi. All of these cases seek to allege claims similar to
those in the Louisiana state court. To date, discovery in these consolidated
cases has been coordinated with the ongoing discovery in the Louisiana class
action. The Company and its subsidiary are vigorously contesting these claims.
The Company and its subsidiary maintain insurance and have filed separate
suits seeking a declaratory judgement of coverage for the October 23, 1995
accident against their general liability and directors and officers liability
insurance carriers. These cases are currently pending in Louisiana state court
with the liability cases. The carrier with the first layer of coverage under the
general liability policy has agreed to pay the Company's and its subsidiary's
defense costs under a reservation of rights. Discovery in these declaratory
judgment cases is proceeding. Five of the nine excess level insurers have moved
for summary judgment before the trial court claiming that coverage for the
accident is excluded because of a pollution exclusion contained in these
policies. The Company is vigorously opposing these motions.
The Company believes the outcome of such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER OBLIGATIONS
CREDIT AGREEMENT
General. On June 30, 1995, the Company entered into the Amended and
Restated Credit Agreement among various financial institutions, Bankers Trust
Company, as agent (the "Agent") and the Company (the "Credit Agreement"). The
Credit Agreement provided for (a) the refinancing of existing term loans,
revolving loans and standby letter of credit loans and (b) an increase in the
existing revolving credit facility.
Term Loans. The outstanding amount of term loans which were refinanced
under the Credit Agreement was $42,704,208.05 as of June 30, 1995. The Company
prepaid the entire amount of such outstanding term loans prior to September 30,
1995 and did not incur any related prepayment premium or penalty. No amounts are
available to be reborrowed under this facility.
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<PAGE> 41
Revolving Credit Facility. The revolving credit facility provides for
borrowings of up to $175 million and expires by its terms and is payable in full
on June 30, 2000. The Company is permitted to issue up to $30 million of letters
of credit as part of its revolving credit facility. The Company has the right to
prepay the revolving credit facility in whole or in part from time to time
without incurring any prepayment premium or penalty. Amounts borrowed under the
revolving credit facility may be repaid and reborrowed.
The revolving credit facility also includes a swing line loan facility. The
swing line loan facility allows the Company to make same day borrowings up to
the lesser of $25 million or the amount currently undrawn and available under
the revolving credit facility. Amounts outstanding under the swing line loan
facility reduce amounts available under the revolving credit facility.
Letter of Credit Loan Facility. The outstanding balance of a promissory
note issued by the Company to the Export-Import Bank of the United States and an
instrument issued at the time of the acquisition by the Company of certain
assets of the Container Products Division of Fibreboard Corporation are the two
obligations collateralized by the letter of credit facility under the Credit
Agreement. Standby letter of credit loans can be incurred only in the event that
either of the two outstanding standby letters of credit are drawn due to the
nonpayment of principal or interest by the Company on the underlying debt
instruments. The standby letter of credit loan commitments are reduced
periodically to reflect principal repayments on the underlying debt instruments.
If the standby letter of credit loans are incurred, the Company will be
required to repay certain of such loans in equal semi-annual installments on the
last business day of the Company's second and fourth fiscal quarters, commencing
with the first such date that the relevant standby letter of credit loans have
been in existence and ending on April 30, 1999. Certain other standby letter of
credit loans will be required to be repaid immediately. Under the Credit
Agreement, the Company will continue to have the right to prepay the standby
letter of credit loans in whole or in part from time to time without incurring
any prepayment premium or penalty. As of June 30, 1997, the aggregate standby
letter of credit commitment was approximately $5.0 million.
Collateral. Indebtedness under the Credit Agreement is secured by a first
priority security interest in substantially all of the Company's assets and a
pledge of all of the outstanding common stock of each of Gaylord Chemical, GMA
Sales Corporation and Gaylord Container de Mexico, S.A. de C.V., each a
subsidiary of the Company.
Interest Rates. Interest accrues on indebtedness under the Credit Agreement
at one or a combination (at the Company's election) of the following: (a) prime
rate loans are payable at a rate per annum which is the Prime Rate (as defined
in the Credit Agreement) plus a borrowing margin of one and one-half percent
(1 1/2%) per annum; (b) certificate of deposit rate loans are payable at a rate
per annum which is the relevant CD Rate (as defined in the Credit Agreement)
plus a borrowing margin of two and five-eighths percent (2 5/8%) per annum; (c)
eurodollar rate loans are payable at a rate per annum which is the relevant
Eurodollar Rate (as defined in the Credit Agreement) plus a borrowing margin of
two and one-half percent (2 1/2%) per annum; and (d) overdue principal and (to
the extent permitted by law) overdue interest in respect of each loan bears
interest at a rate per annum equal to two percent (2%) per annum above the Prime
Rate plus one and one-half percent (1 1/2%). Interest is computed based on
actual days elapsed in a 360-day year, payable monthly, and with respect to
eurodollar rate loans and certificate of deposit rate loans, subject to
compensation, increased cost, indemnification and other standard Eurodollar Rate
and CD Rate pricing provisions. The Company has the option upon the expiration
of any interest period to convert all or any part of the outstanding borrowings
to any of such three interest rate options, subject to certain customary
exceptions. Whenever the Company desires to borrow under the Credit Agreement,
the Company selects the type of loan and interest rate in a notice of borrowing
delivered to the Agent at least one business day in advance of the proposed
funding date in the case of a loan at the Prime Rate, at least two business days
in advance of the proposed funding date in the case of a loan at the CD Rate,
and three business days in the case of a loan at the Eurodollar Rate. Swing line
loans (as defined in the Credit Agreement) are automatically borrowed at the
Prime Rate option described above.
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Commitment Fees. The Company is obligated to pay the Agent, for pro rata
distribution to the Banks (according to commitments), an unused commitment fee
computed at the rate of (a) 3/8 of 1% per annum from June 30, 1995 until such
time as outstanding revolving loans under the Credit Agreement equal or exceed
$66 million and thereafter, at a rate of 1/2 of 1% per annum (on the basis of
actual days elapsed in a 365/366-day year, as applicable) with respect to the
unutilized revolving loan commitment.
Affirmative Covenants and Financial Tests. The Credit Agreement contains
various covenants regarding financial reporting, compliance with laws,
maintenance of corporate existence and maintenance of adequate insurance
coverage. In addition, the Credit Agreement requires that the Company must
maintain a specified minimum interest coverage ratio, minimum net worth, and
minimum current ratio. Certain financial covenants were modified in the third
quarter of fiscal 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Negative Covenants. The Credit Agreement contains covenants which, among
other things, limit the Company's ability to (a) incur additional obligations
for borrowed money, (b) create or permit liens on the Company's assets, (c) make
capital expenditures, (d) make guarantees, (e) acquire the assets or capital
stock of other businesses, (f) merge or consolidate, (g) dispose of any accounts
receivable and assets constituting collateral of the Banks, (h) make
investments, (i) make any voluntary prepayments of any indebtedness for money
borrowed (other than under the Credit Agreement), (j) pay dividends and (k)
enter into transactions with affiliates.
Events of Default. The Credit Agreement contains customary events of
default (subject to cure periods where applicable) including, but not limited
to, failure to pay principal, interest or other amounts due to the Banks, breach
of representations and warranties contained in the Credit Agreement and related
collateral documents, failure to meet covenants contained in the Credit
Agreement, cross-defaults to other indebtedness in an amount of $1 million or
more, certain events of bankruptcy or insolvency, attachment of judgments of $1
million or more, determination of certain liabilities related to ERISA (as
defined), uninsured damage to the Company's property in excess of $5 million and
a change of control of the Company.
AMENDMENTS TO THE CREDIT AGREEMENT
In connection with the Initial Note Offering, the Redemption and the
Exchange Offer, the Company entered into certain amendments to the Credit
Agreement to permit such transactions.
12 3/4% DEBENTURES
As of June 30, 1997, the Company had outstanding $404,327,000 aggregate
principal amount of the 12 3/4% Debentures. The Company issued $434,222,000 in
aggregate principal amount (discounted to $299,999,638 at the issue date) of the
12 3/4% Debentures under an Indenture dated as of May 18, 1993, between the
Company and Ameritrust Texas, National Association, as Trustee (the "12 3/4%
Debenture Indenture"). In fiscal 1996, the Company repurchased on the open
market and retired approximately $29.9 million principal amount of the 12 3/4%
Debentures.
The 12 3/4% Debentures are unsecured obligations of the Company and are
subordinated in right of payment to all Senior Debt of the Company (as defined
in the 12 3/4% Debenture Indenture) which term includes the Notes offered
hereby.
The 12 3/4% Debentures are redeemable at the option of the Company, in
whole or in part, at any time on or after May 15, 1998, initially at 106.38% of
their principal amount, plus accrued interest, declining to 100% of their
principal amount, plus accrued interest on or after May 15, 2003.
The 12 3/4% Debenture Indenture contains certain restrictive covenants that
among other things, limit the ability of the Company and its subsidiaries to
incur indebtedness, make restricted payments, engage in transactions with
stockholders and affiliates, issue capital stock of subsidiaries, sell assets,
engage in mergers and consolidations and make investments in unrestricted
subsidiaries.
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OLD NOTES
Concurrently with the consummation of the Initial Note Offering, the
Company provided an irrevocable notice of the exercise of its option to redeem
all outstanding Old Notes ($179,700,000 aggregate principle amount) and
deposited into an escrow account U.S. Treasury bills in an amount sufficient to
fund 104.93% of the principal amount of, plus accrued and unpaid interest on,
the Old Notes to July 13, 1997. The Old Notes were redeemed by the Escrow Agent
on July 14, 1997. The Old Notes were issued under an Indenture dated as of May
18, 1993, between the Company and Fleet National Bank, as successor to Shawmut
Bank Connecticut, National Association, as Trustee (the "Old Note Indenture").
The Old Notes were senior unsecured obligations of the Company with a maturity
date of May 15, 2001.
TRADE RECEIVABLE FACILITY
In September 1993, the Company established a $70.0 million trade
receivables backed revolving credit facility (the "Trade Receivable Facility")
pursuant to which a wholly owned, special purpose subsidiary, Gaylord
Receivables Corporation ("GRC") purchases (on an ongoing basis) substantially
all of the accounts receivable of the Company. Concurrently, GRC and a group of
banks established the Trade Receivable Facility which is due in September, 1999.
GRC transfers the accounts receivable to a trust in exchange for certain trust
certificates representing ownership interests in the accounts receivable. The
trust certificates received by GRC from the trust are solely the assets of GRC.
In the event of liquidation of GRC, the creditors of GRC would be entitled to
satisfy their claims from GRC's assets prior to any distribution to the Company.
GRC has various interest rate options for Trade Receivable Facility
borrowings based on one or a combination of the following two rates: (i) prime
rate loans at the higher of (a) the prime rate in effect from time to time or
(b) the relevant federal funds rate plus 0.5 percent per annum, or (ii) LIBOR
rate loans at the relevant LIBOR rate plus a borrowing margin of 0.75 percent
per annum. Interest is payable monthly. GRC is obligated to pay a commitment fee
of 0.5 percent per annum on the unused credit available under the Trade
Receivable Facility. Credit availability under the Trade Receivable Facility is
based on a borrowing base formula. As a result, the full amount of the facility
may not be available at all times. At June 30, 1997, $43.0 million was
outstanding under the Trade Receivable Facility and approximately $15.7 million
of additional credit was available to GRC pursuant to the borrowing base
formula. The highest outstanding principal balance under the Trade Receivable
Facility during fiscal 1996 was $30.0 million and the weighted average interest
rate was 8.2%. At June 30, 1997 and 1996, the Company's consolidated balance
sheet included $82.4 million and $98.3 million, respectively, of accounts
receivable sold to GRC.
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DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes offered hereby will be issued as a separate series under
an indenture (the "Indenture") dated as of June 12, 1997 by and between the
Company and State Street Bank and Trust Company, as successor to Fleet National
Bank, as trustee (the "Trustee"). The form and terms of the Exchange Notes are
the same as the form and terms of the Initial Notes (which they replace) except
that (i) the Exchange Notes bear a Series B designation and a different CUSIP
number, (ii) the issuance of the Exchange Notes has been registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof, and (iii) the holders of Exchange Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Initial Notes in certain circumstances relating to the timing of the Exchange
Offer, which rights will terminate when the Exchange Offer is consummated. The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the
provisions of the Indenture (a copy of which has been filed as an exhibit to the
Exchange Offer Registration Statement), including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
TIA as in effect on the date of the Indenture. The definitions of certain
capitalized terms used in the following summary are set forth under "Certain
Definitions." The Exchange Notes and the Initial Notes are referred to herein
collectively as the "Notes."
The Notes will be unsecured obligations of the Company and will rank pari
passu in right of payment to all senior indebtedness of the Company, including
all obligations of the Company under the Credit Agreement. The Notes will rank
senior in right of payment to the obligations of the Company under the 12 3/4%
Debentures.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders. The Company will pay
principal (and premium, if any) on the Notes at the Trustee's corporate office
in New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
holders. Any Initial Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, will be treated as a single class of securities under the
Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $225,000,000 and
will mature on June 15, 2007. Interest on the Notes will accrue at the rate of
9 3/4% per annum and will be payable semi-annually on each June 15 and December
15, commencing on December 15, 1997, to the persons who are registered holders
at the close of business on each June 1 and December 1 immediately preceding the
applicable interest payment date. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance. The Company shall pay interest on
overdue principal from time to time on demand at the rate of 10 3/4% per annum;
it shall pay interest on overdue installments of interest (without regard to any
applicable grace periods) from time to time on demand at the rate of 10 3/4% per
annum. Interest will be computed on the basis of a 360-day year comprising
twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole at any time
or in part from time to time, on or after June 15, 2002 at the following
redemption prices (expressed as percentages of the principal
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<PAGE> 45
amount) if redeemed during the twelve-month period commencing on June 15 of the
year set forth below, plus, in each case, accrued and unpaid interest, if any,
thereon to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.875%
2003........................................................ 103.250%
2004........................................................ 101.625%
2005 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to June 15, 2000, the
Company may redeem up to 33% of the aggregate principal amount of Notes with the
net proceeds from one or more Equity Offerings of the Company at a redemption
price equal to 109.75% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of redemption; provided, however, that,
after giving effect to any such redemption, at least $100.0 million aggregate
principal amount of the Notes originally issued remain outstanding. Any such
redemption must occur on or prior to 120 days after the receipt of such net
proceeds.
In addition, upon the occurrence of a Change of Control prior to June 15,
2002, the Company, at is option, may redeem all, but not less than all, of the
outstanding Notes at a redemption price equal to 100% of the principal amount
thereof plus the applicable Make-Whole Premium (a "Change of Control
Redemption"). The Company shall give not less than 30 nor more than 60 days
notice of such redemption within 30 days following a Change of Control.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants.
Limitation on Restricted Payments. The Indenture provides that the Company
shall not, and shall not permit any of its Restricted Subsidiaries to, directly
or indirectly, (a) declare or pay any dividend or make any distribution (other
than dividends or distributions payable in Qualified Capital Stock of the
Company) on shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, other than the exchange of such
Capital Stock for Qualified Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company or its Restricted
Subsidiaries that is subordinate or junior in right of payment to the Notes or
(d) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing, (ii) the Company is not able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness"
covenant or (iii) the aggregate amount of Restricted Payments made subsequent to
the Issue Date (the amount expended for such purposes, if other than in cash,
shall be the fair market value of such property as determined by the Board of
Directors of the Company in good faith) shall exceed the sum, without
duplication, of: (w) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company earned during the period beginning on the first day of the fiscal
year of the Company commencing after the Issue Date and ending on the last day
of the most recent fiscal quarter ending at least 45 days prior to the date the
Restricted Payment occurs (treating such period as a single accounting period);
(x) 100% of the aggregate net proceeds, including the fair market value of
property other than cash as determined by the Board of Directors of the Company
in good faith, received by the Company from any Person (other than a Restricted
Subsidiary of the Company) from the issuance and sale subsequent to the Issue
Date of Qualified Capital Stock of the Company or of debt securities of the
Company that have been converted into Qualified Capital Stock (excluding (A)
Qualified Capital Stock made as a distribution on any Capital Stock or as
interest on any Indebtedness and (B) any net proceeds from issuances and sales
of Qualified Capital Stock financed directly or indirectly using funds borrowed
from the Company or any Restricted Subsidiary of the Company, until and
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<PAGE> 46
to the extent such borrowing is repaid), (y) $50 million and (z) the amount of
the net reduction in Investments made as Restricted Payments in accordance with
this sentence in Unrestricted Subsidiaries resulting from (1) the payment of
cash dividends or the repayment in cash of the principal of loans or the cash
return on any Investment, in each case to the extent received by the Company or
any wholly owned Restricted Subsidiary of the Company from Unrestricted
Subsidiaries, (2) to the extent that any Investment in an Unrestricted
Subsidiary that was made after the date of this Indenture is sold for cash or
otherwise liquidated or repaid for cash, the after-tax cash return of capital
with respect to such Investment (less the cost of disposition, if any) or (3)
the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries, such
aggregate amount of the net reduction in such Investments not to exceed, in the
case of any Unrestricted Subsidiary, the amount of such Investments made as
Restricted Payments previously made by the Company or any Restricted Subsidiary
in such Unrestricted Subsidiary, which amount was included in the calculation of
the amount of Restricted Payments.
Notwithstanding the foregoing, these provisions do not prohibit: (1) the
payment of any dividend, making of any distribution or consummation of
irrevocable redemption within 60 days after the date of declaration of such
dividend, making of such distribution or giving of such notice if the dividend,
distribution or redemption would have been permitted on the date of declaration;
(2) the acquisition of Capital Stock or Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes, either (i) in exchange
for shares of Qualified Capital Stock or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Restricted
Subsidiary of the Company) of shares of Qualified Capital Stock; (3) the
acquisition of Indebtedness of the Company that is subordinate or junior in
right of payment to the Notes, either (i) in exchange for Indebtedness of the
Company that is subordinate or junior in right of payment to the Notes, at least
to the extent that the Indebtedness being acquired is subordinated to the Notes,
and has no scheduled principal prepayment dates prior to the earlier of (a) at
least one year after the scheduled final maturity date of the Notes or (b) the
scheduled final maturity date of the Indebtedness being exchanged, (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Restricted Subsidiary of the Company) of Indebtedness of the
Company that is subordinate or junior in right of payment to the Notes, at least
to the extent that the Indebtedness being acquired is subordinated to the Notes,
and has no scheduled principal prepayment dates prior to the earlier of (a) the
scheduled final maturity date of the Notes or (b) the scheduled final maturity
date of the Indebtedness being refinanced or (iii) any combination of clauses
(i) and (ii) above; (4) the elimination of fractional shares or warrants; (5)
the purchase for value of shares of Capital Stock of the Company (x) held by
directors, officers or employees upon death, disability, retirement, termination
of employment or (y) to fund capital stock-based, long-term incentive programs,
not to exceed $4 million in the aggregate; (6) the repurchase of any 12 3/4%
Debentures in accordance with (i) the "Limitation on Asset Sales" and "Change of
Control" covenants hereunder and (ii) Sections 4.15 and 4.16 of the 12 3/4%
Debenture Indenture; (7) the redemption or repurchase by the Company of up to
$200 million aggregate principal amount of 12 3/4% Debentures through the
application of (a) up to $200 million of net cash proceeds of a substantially
concurrent sale or incurrence (other than to or from a Restricted Subsidiary of
the Company) of secured or unsecured Indebtedness of the Company that ranks pari
passu with the Notes as to payment, (b) up to $100 million of cash from
operations of the Company or (c) any combination of (a) and (b), (8) Restricted
Payments for the redemption, repurchase or other acquisition of shares of
Capital Stock of the Company in satisfaction of indemnification or other claims
arising under any merger, consolidation, asset purchase or investment or similar
acquisition agreement permitted under the Indenture, pursuant to which such
shares of Capital Stock were issued and (9) repurchases of Capital Stock deemed
to occur upon exercise of employee or director stock options; provided that in
the case of clauses (2), (3), (4), (5), (6), (7) and (8), no Default or Event of
Default shall have occurred or be continuing at the time of such payment or as a
result thereof. In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date, amounts expended pursuant to clauses (1), (2),
(4), (5), (6), 7(b) and (8) shall be included in such calculation; provided that
amounts expended pursuant to clause (2) shall constitute Restricted Payments
only to the extent any amounts are credited pursuant to clause (iii)(x) of the
next preceding paragraph.
Limitation on Incurrence of Additional Indebtedness. The Indenture provides
that the Company shall not, and shall not permit any of its Restricted
Subsidiaries to, after the Issue Date, directly or indirectly,
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<PAGE> 47
create, incur, assume, guarantee, acquire or become liable, contingently or
otherwise, or otherwise become responsible for the payment of any Indebtedness
other than Permitted Indebtedness. Notwithstanding the foregoing limitations,
the Company and, subject to compliance with the covenant "Guarantees by
Restricted Subsidiaries," Restricted Subsidiaries may incur Indebtedness if (i)
no Default or Event of Default shall have occurred and be continuing at the time
of or as a consequence of the incurrence of such Indebtedness and (ii) the
Consolidated Fixed Charge Coverage Ratio of the Company, measured on the date of
the incurrence of such Indebtedness, is greater than 2.0:1. No Indebtedness
incurred pursuant to the next preceding sentence shall be included in
calculating any limitation set forth in the definition of Permitted
Indebtedness. Upon the repayment of Indebtedness which may have been incurred
pursuant to more than one provision of this Indenture, the Company may, in its
sole discretion designate which provision such Indebtedness shall have been
incurred under.
Guarantees by Restricted Subsidiaries. The Indenture provides that the
Company will cause any Borrowing Restricted Subsidiary to become a Subsidiary
Guarantor by executing a guarantee (the "Guarantee") of payment of the Notes by
such Borrowing Restricted Subsidiary (1) if, at the time the Restricted
Subsidiary first becomes a Borrowing Restricted Subsidiary, the total Investment
of the Company and the Restricted Subsidiaries in such Borrowing Restricted
Subsidiary and in all other Borrowing Restricted Subsidiaries that are not
Subsidiary Guarantors, is more than 15% of Total Tangible Assets (the "15%
Investment Threshold"), or (2) if, at the time a Borrowing Restricted Subsidiary
increases the amount of Restricted Subsidiary Indebtedness (excluding for this
purpose, incurrences of indebtedness under a revolving credit facility that do
not exceed the maximum committed borrowings thereunder), the 15% Investment
Threshold is met, or (3) if, at the time the Company or any Restricted
Subsidiary makes a capital contribution or other equity investment in excess of
$1 million during any six-month period in any Borrowing Restricted Subsidiary,
the 15% Investment Threshold is met. If any such incurrence of liability of such
Restricted Subsidiary is provided in respect of Indebtedness that is expressly
subordinated to the Notes, the guarantee or other instrument provided by such
Restricted Subsidiary in respect of such subordinated Indebtedness shall be
subordinated to the Guarantee pursuant to subordination provisions no less
favorable to holders of the Notes than those contained in the 12 3/4% Indenture.
A Borrowing Restricted Subsidiary shall be released as a Subsidiary Guarantor
(i) at such time as it ceases to be a Borrowing Restricted Subsidiary or (ii)
upon the election of the Company, if, after giving effect to such election, the
15% Investment Threshold is not met.
Limitations on Transactions with Affiliates. The Indenture provides that
the Company shall not, and shall not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or permit to exist any transaction
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with or for the benefit of, an
Affiliate of the Company or any Restricted Subsidiary (other than transactions
between the Company and a wholly owned Restricted Subsidiary of the Company) (an
"Affiliate Transaction"), other than Affiliate Transactions on terms that are no
less favorable in the aggregate than those that might reasonably have been
obtained or are obtainable in a comparable transaction on an arm's-length basis
from a person that is not an Affiliate; provided that neither the Company nor
any of its Restricted Subsidiaries shall enter into an Affiliate Transaction or
series of related Affiliate Transactions involving or having a value of $10
million or more, unless a majority of disinterested members of the Board of
Directors of the Company determines in good faith as evidenced by a board
resolution that the terms are no less favorable in the aggregate to the Company
than those that might reasonably have been obtained in a comparable transaction
on an arm's-length basis from a Person that is not an Affiliate; provided,
however, that (i) any employment agreement or stock option agreement entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business, (ii) transactions permitted under the covenant described above
under "Certain Covenants -- Limitation on Restricted Payments," (iii) the
payment of reasonable fees and expenses to directors of the Company or its
Restricted Subsidiaries, (iv) any issuance of securities or other payments,
awards or grants in cash, securities or otherwise pursuant to, or the funding of
employment arrangements, stock options and stock ownership plans of the Company
entered into in the ordinary course of business and (v) transactions pursuant to
agreements existing on the Issue Date or any amendment thereto or any
transactions contemplated thereby (including pursuant to any amendment thereto)
in any replacement agreement thereto, so long as any such amendment or
replacement is not more
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<PAGE> 48
disadvantageous to the holders in any material respect than the original
agreement as in effect on the Issue Date, in each case, shall not be deemed
Affiliate Transactions.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or permit to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (a) pay dividends or
make any other distributions on its Capital Stock, (b) make loans or advances or
to pay any Indebtedness or other obligation owed to the Company or a Restricted
Subsidiary of the Company or (c) transfer any of its property or assets to the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) customary nonassignment
provisions of any lease governing a leasehold interest of the Company or any
Restricted Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to the Company
or any Restricted Subsidiary of the Company, or the properties or assets of the
Company or any Restricted Subsidiary of the Company, other than the Person, the
properties or assets so acquired; (5) agreements existing on the Issue Date; (6)
any Trade Receivable Facility; (7) customary nonassignment provisions in
contracts entered into in the ordinary course of business, (8) Indebtedness of a
Restricted Subsidiary permitted to be incurred under the Indenture or (9) an
agreement effecting a refinancing, modification, replacement, renewal,
restatement, refunding, deferral, extension, substitution, supplement,
reissuance or resale of Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4), (5), (6) or (8) above; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such refinancing, replacement or substitution agreement are not
less favorable to the Company or Restricted Subsidiary, as the case may be, in
any material respect in the reasonable judgment of the Board of Directors of the
Company than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4), (5), (6) or (8).
Limitation on Asset Sales. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, consummate an
Asset Sale unless (a) the Company or the applicable Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Board of Directors of the Company, (b) at least
75% of the consideration received by the Company or the Restricted Subsidiary,
as the case may be, from such Asset Sale shall be cash or Cash Equivalents and
is received at the time of such disposition; provided, however, that this
condition shall not apply to a transaction whereby the Company or any Restricted
Subsidiary effects an Asset Sale by the exchange of assets or property for
Productive Assets or to the sale or other disposition of all or any portion of
the Company's East Mill assets located in Antioch, California, provided,
further, that the amount of (A) any liabilities of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated in right
of payment to the Notes) that are assumed by the transferee of any such assets
shall be deemed to be cash for purposes of this provision and (B) any notes or
other obligations received by the Company or such Restricted Subsidiary from
such transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received) shall be deemed to be
cash for purposes of this provision, and (c) the Company shall (i) apply, or
cause such Restricted Subsidiary to apply, such Net Cash Proceeds of such Asset
Sale within 270 days of the consummation of such Asset Sale (A) to prepay
indebtedness ranking pari passu with the Notes, senior indebtedness of a
Subsidiary Guarantor or debt of a Restricted Subsidiary that is not a Subsidiary
Guarantor or, in the case of any debt under a revolving credit facility, effect
a reduction in the committed availability under any such revolving credit
facility or (B) to make an offer to purchase the Notes and, to the extent
required by the documentation governing such indebtedness and on a pro rata
basis, indebtedness ranking pari passu with the Notes, at a price equal to 100%
of the principal amount of the Notes plus accrued interest thereon to the date
of purchase pursuant to an offer to purchase made by the Company as set forth
below (a "Net Proceeds Offer"), or (ii)(A) commit, or cause such Restricted
Subsidiary to commit (such commitments to include amounts anticipated to be
expended pursuant to the Company's capital investment plan (x) as adopted by the
Board of Directors of the Company and (y) evidenced by the filing of an
officer's certificate with the Trustee stating that the total amount of the Net
Cash Proceeds of such Asset Sale is less than the aggregate amount contemplated
to be expended pursuant to such capital investment plan within 24 months of the
consummation of such Asset Sale) within 270 days of the consummation of such
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<PAGE> 49
Asset Sale, to apply the Net Cash Proceeds of such Asset Sale to reinvest in
Productive Assets and (B) apply, or cause such Restricted Subsidiary to apply,
pursuant to such commitment (which includes amounts actually expended under the
capital investment plan authorized by the Board of Directors of the Company),
such Net Cash Proceeds of such Asset Sale within 24 months of the consummation
of such Asset Sale; provided that if any commitment under this clause (ii) is
terminated or rescinded after the 225th day after the consummation of such Asset
Sale, the Company or such Restricted Subsidiary, as the case may be, shall have
45 days after such termination or rescission to (1) apply such Net Cash Proceeds
pursuant to clause (c)(i) above or (2) to commit, or cause such Restricted
Subsidiary to commit, to apply the Net Cash Proceeds of such Asset Sale to
reinvest in Productive Assets; provided that in any such case, such proceeds
must be applied pursuant to clause (c)(i) or such commitment, as the case may
be, no later than 24 months after the consummation of such Asset Sale or (iii)
any combination of the foregoing; provided, further, that if at any time any
non-cash consideration received by the Company or any Restricted Subsidiary of
the Company, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash, then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with clause (c) above; and
provided, further, that the Company may defer making a Net Proceeds Offer until
the aggregate Net Cash Proceeds from Asset Sales to be applied equals or exceeds
$10 million. Pending the final application of any such Net Cash Proceeds the
Company or such Restricted Subsidiary may temporarily reduce Indebtedness under
a revolving credit facility, if any.
Each Net Proceeds Offer will be mailed to holders of Notes as shown on the
register of holders of Notes within 270 days, will specify the purchase date
(which will be no earlier than 30 days nor later than 45 days from the date such
notice is mailed) and will otherwise comply with the procedures set forth in the
Indenture. Upon receiving notice of a Net Proceeds Offer, holders of Notes may
elect to tender their Notes in whole or in part in integral multiples of $1,000.
To the extent holders of the Notes properly tender Notes in an amount exceeding
the applicable Net Proceeds Offer, such Notes of tendering holders will be
repurchased on a pro rata basis (based upon the principal amount tendered).
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, create, incur, assume or
suffer to exist any Liens upon their respective assets, except for (a) Liens
securing Indebtedness under the Credit Agreement, (b) Permitted Liens, (c) Liens
securing Acquired Indebtedness, (d) Liens existing on the Issue Date, (e) Liens
securing Indebtedness to the extent incurred to refinance, replace, renew or
refund secured Indebtedness existing on the Issue Date or Acquired Indebtedness,
(f) Liens securing pollution control bonds and industrial revenue bonds, (g)
Liens securing Indebtedness permitted to be incurred pursuant to clauses (viii)
or (ix) of the definition of Permitted Indebtedness, (h) Liens securing
Indebtedness pursuant to clauses (vii) or (xi) of the definition of Permitted
Indebtedness; provided, however, that if such Indebtedness is incurred to
finance the cost of the property subject to a Lien securing such Indebtedness,
the principal amount of the Indebtedness secured by such Lien shall not exceed
100% of the cost of the property subject thereto plus related financing costs,
(i) Liens in favor of the Trustee and the trustee in respect of any other
outstanding indebtedness of the Company, (j)Liens granted in connection with the
redemption of the Old Notes, or (k) any replacement, extension, renewal,
amendment or modification, in whole or in part, of any Lien described above;
provided that to the extent any such clause limits the amount secured or the
assets subject to such Liens, no extension or renewal will increase the amount
or assets secured by or subject to such Liens.
Merger, Consolidation and Sale of Assets. The Indenture provides that the
Company may not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets to,
another Person or adopt a plan of liquidation, unless (a) either the Company
shall be the survivor of such merger or consolidation or the surviving Person is
a corporation, partnership, limited liability company or trust organized and
existing under the laws of the United States, any state thereof or the District
of Columbia and such surviving Person shall expressly assume, by a supplemental
indenture, all the obligations of the Company under the Notes and the
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<PAGE> 50
related Indenture; (b) immediately after giving effect to such transaction (on a
pro forma basis, including any Indebtedness incurred or anticipated to be
incurred in connection with such transaction), the Company or the surviving
Person is able to incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant, (c) immediately after giving effect to such transaction
and the assumption of the obligations set forth in clause (a) above and the
incurrence of any Indebtedness to be incurred in connection therewith, no
Default or Event of Default shall have occurred and be continuing and (d) the
Company has delivered to the Trustee an Officers' Certificate and Opinion of
Counsel, each stating that such consolidation, merger, or transfer or adoption
and such supplemental indenture comply with the Indenture, that the surviving
Person (if other than the Company) agrees to be bound thereby and that all
conditions precedent in the Indenture relating to such transaction have been
satisfied. Notwithstanding the foregoing clauses (b), (c) and (d), any
Restricted Subsidiary of the Company may consolidate with, merge into or
transfer all or part of its properties and assets to the Company. For purposes
of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a
single transaction or series of transactions) of all or substantially all of the
properties and assets of one or more Restricted Subsidiaries, the Capital Stock
of which constitutes all or substantially all of the properties and assets of
the Company, shall be deemed to be the transfer of all or substantially all of
the properties and assets of the Company.
Limitation on Incurrence of Subordinated Indebtedness. The Indenture
prohibits the Company from incurring Indebtedness that is subordinated by
written agreement in right of payment to any other Indebtedness of the Company,
unless the Indebtedness to be incurred is subordinated to the Notes to
substantially the same extent as it is subordinated to such other Indebtedness
pursuant to such written agreement.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each holder will have the right to require that the Company repurchase all or a
portion of such holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company will send, by first class mail, a notice to each holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the business day prior to the Change of Control Payment Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(a) the failure to pay interest on any Notes for a period of 30 days after such
interest becomes due and payable (whether or not such payment shall be
prohibited by the subordination provisions of the Indenture), (b) the failure to
pay the principal on any Notes when such principal becomes due and payable, at
maturity, upon acceleration or redemption or pursuant to an offer to purchase
required by the Indenture (whether or not such payment shall be prohibited by
the subordination provisions of the Indenture); (c) a default in the observance
or performance of any other covenant or agreement contained in the Indenture,
which default continues for a period of 30 days after the Company receives
written notice of the default by the Trustee or holders of at least 25% in
principal amount of the Notes; (d) the failure to pay at stated maturity the
principal amount of any
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Indebtedness of the Company or any Restricted Subsidiary of the Company, or the
acceleration of the stated maturity of any such Indebtedness, if the aggregate
principal amount of such Indebtedness, together with the principal amount of any
other such Indebtedness in default for failure to pay principal at stated
maturity or that has been accelerated, aggregates $20 million or more at any
time; (e) one or more judgments in an aggregate amount in excess of $20 million
shall have been rendered against the Company or any of its Restricted
Subsidiaries and such judgments remain undischarged or unstayed for a period of
60 days after such judgment or judgments become final and non-appealable and (f)
certain events of bankruptcy, insolvency or reorganization affecting the Company
or any of its Restricted Subsidiaries.
Upon the occurrence of any Event of Default specified in the Indenture, the
Trustee or the holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by written notice to the Company. Upon any such declaration, such amount
shall be immediately due and payable. If an Event of Default with respect to
bankruptcy, insolvency or reorganization proceedings occurs and is continuing,
then such amount shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of any of the Trustee or any
holder of Notes.
The Indenture provides that, at any time after a declaration of
acceleration with respect to Notes as described in the preceding paragraph, the
holders of a majority in principal amount of the outstanding Notes may rescind
and cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) if, to the extent the
payment of such interest is lawful, interest on overdue installments of interest
and overdue principal, which has become due otherwise than by such declaration
of acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) if, in the event of the cure or waiver of a
Default or Event of Default of the type described in clause (f) of the
description above of Events of Default, the Trustee shall have received an
Officers' Certificate and an Opinion of Counsel that such Default has been cured
or waived. The holders of a majority in principal amount of the Notes may waive
any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any of such Notes.
SATISFACTION AND DISCHARGE OF INDENTURES; DEFEASANCE
The Company may terminate its obligations under the Indenture at any time
by delivering all outstanding Notes to the Trustee for cancellation. The
Company, at its option, (i) will be discharged from any and all obligations with
respect to the Notes (except for certain obligations of the Company to register
the transfer or exchange of such Notes, replace stolen, lost or mutilated Notes,
maintain paying agencies and hold moneys for payment in trust) or (ii) need not
comply with certain of the restrictive covenants with respect to the Indenture
if the Company deposits with the Trustee, in trust, money, U.S. Legal Tender or
U.S. Government Obligations that, through the payment of interest thereon and
principal thereof in accordance with their terms, will provide money in an
amount sufficient to pay all the principal of and interest on the Notes on the
dates such payments are due in accordance with the terms of such Notes as well
as the Trustee's fees and expenses. To exercise any such option, the Company is
required to deliver to the Trustee (A) an Opinion of Counsel to the effect that
the holders of such Notes will not recognize income, gain or loss for federal
income tax purposes as a result of the deposit and related defeasance and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such option had not been
exercised and, in the case of a discharge pursuant to clause (i) above,
accompanied by a ruling to such effect received from or published by the IRS,
and (B) an Officers' Certificate and an Opinion of Counsel to the effect that
all conditions precedent to the defeasance have been satisfied. Notwithstanding
the foregoing, the Opinion of Counsel required by clause (A) above need not be
delivered if all Notes not theretofore delivered to the Trustee for cancellation
(i) have become due and payable, (ii) will become due and payable on the
maturity date within one year or (iii) are to be called for redemption within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company.
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REPORTS TO HOLDERS
The Company shall file with the Trustee, within 15 days after filing with
the Commission, copies of the annual reports and of the information, documents
and other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) that the Company files with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. In the event
the Company is no longer subject to these periodic reporting requirements of the
Exchange Act, it will nonetheless continue to file reports with the Commission
and the Trustee as if it were subject to such periodic reporting requirements.
Regardless of whether the Company is required to furnish such reports to its
stockholders pursuant to the Exchange Act, the Company shall cause its
consolidated financial statements, comparable to that which would have been
required to appear in annual or quarterly reports, to be delivered to the
holders of the Notes.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee without the consent of the
holders of the Notes may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an Opinion of Counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the holders of a majority in principal amount of the then outstanding Notes,
except that, without the consent of each holder of the Notes affected thereby,
no amendment may (i) change the principal amount of Notes whose holders must
consent to an amendment, supplement or waiver of any provision of the Indenture,
(ii) reduce the rate or extend the time for payment of interest on any Notes,
(iii) reduce the principal amount of any Notes, (iv) change the maturity date of
any Notes or alter the optional redemption provisions in the Indenture or the
Notes in a manner adverse to any holder, (v) make any changes in the provisions
concerning waivers of Defaults or Events of Default by holders or the rights of
holders to recover the principal of, interest on or optional redemption payment
with respect to any Notes or (vi) make the principal of, or interest on, any
Notes payable with anything or in any manner other than as provided for in the
Indenture and the Notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or assumed in connection with the acquisition of assets from such
Person and not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary of the Company or
such acquisition.
"Affiliate" means a Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
the Company. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing. Notwithstanding the foregoing, any Person
established in connection with any Trade Receivable Facility shall not be deemed
an Affiliate. For purposes of the covenant "Limitation on Transactions with
Affiliates," the term "Affiliate" shall include any Person who, as a result of
any transaction described in the "Limitation on Transactions with Affiliates"
covenant, would become an Affiliate.
"Asset Acquisition" means (i) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged
with the Company or any Restricted Subsidiary of the Company or (ii) the
acquisition by the Company or any Restricted Subsidiary of the Company of assets
of any Person or any division or line of business of such Person.
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"Asset Sale" means the sale, lease (other than an operating lease),
assignment or other disposition (including, without limitation, dispositions
pursuant to Sale and Leaseback Transactions) by the Company or one of its
Restricted Subsidiaries to any Person other than the Company or one of its
Restricted Subsidiaries of (i) any capital stock of any Restricted Subsidiary,
(ii) all or substantially all of the properties and assets of any division or
line of business of the Company or any Restricted Subsidiary of the Company or
(iii) any other assets of the Company or any of its Restricted Subsidiaries
greater than $5 million individually, other than those assets sold in the
ordinary course of business of the Company or such Restricted Subsidiary,
respectively. For the purposes of this definition, the term "Asset Sale" shall
not include (i) Capital Stock of the Company, (ii) any transfer of trade
receivables or related assets pursuant to any Trade Receivable Facility, (iii)
any sale, issuance, conveyance, transfer, lease or other disposition of
properties or assets that is governed by the provisions set forth under the
"Merger, Consolidation and Sale of Assets" covenant, (iv) an issuance of Capital
Stock by a Restricted Subsidiary to the Company or to a wholly owned Restricted
Subsidiary, (v) a disposition consisting of a Permitted Investment or Restricted
Payment permitted by the "Limitation on Restricted Payments" covenant, (vi) the
surrender or waiver of contract rights or the settlement, release or surrender
of contract, tort or other claims of any kind, (vii) the grant in the ordinary
course of business of any license of patents, trademarks, registrations thereof
and other similar intellectual property, (viii) the sale or discount, in each
case without recourse, of accounts receivables arising in the ordinary course of
business, but only in connection with the compromise or collection thereof, (ix)
the sale for cash or exchange of specific items of equipment, so long as the
purpose of each such sale or exchange is to acquire (and results within 90 days
of such sale or exchange in the acquisition of) replacement items of equipment
which are the functional equivalent of the item of equipment so sold or
exchanged and (x) disposals or replacements of obsolete equipment in the
ordinary course of business.
"Borrowing Restricted Subsidiary" shall mean any Restricted Subsidiary that
incurs, or otherwise becomes liable for, in excess of $5.0 million of Restricted
Subsidiary Indebtedness.
"Capital Stock" means (i) with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, including each class of common stock and preferred stock of
such Person and (ii) with respect to the Company or any other Person formed
other than as a corporation, any and all partnership, membership or other equity
interests of the Company or such other Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof, (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation or Moody's Investors
Service, (iii) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at least
A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors
Service, (iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any commercial bank
organized under the laws of the United States of America or any state thereof or
the District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than $250
million, (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (iv) above and (vi)
investments in money market funds which invest substantially all their assets in
securities of the types described in clauses (i) through (v) above.
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"Change of Control" means if at any time any Person or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) acquires, in one or
more transactions, (i) beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of 50% or more of the voting power represented by all
voting securities of the Company or (ii) the power to elect a majority of the
Board of Directors of the Company; provided, however, that voting securities
beneficially owned by or voting power controlled by such Person or group will
not be deemed to include common stock beneficially owned or voting power
controlled so long as it is beneficially owned or controlled directly or
indirectly by Mid-America Group, Ltd. (but only so long as MAG is controlled by
Mr. Marvin A. Pomerantz and/or his spouse or their respective heirs or lineal
descendants), or Mr. Marvin A. Pomerantz or Mr. Warren J. Hayford, their
respective spouses or their respective heirs or lineal descendants.
"Commodity Agreements" means without limitation any commodity futures
contract, commodity option agreement or other similar agreement or arrangement
entered into by the Company designed to protect the Company against fluctuations
in the prices of commodities used in the ordinary course of business and not
entered into for any other purpose.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income, (ii) to the extent
Consolidated Net Income has been reduced thereby, all income taxes of such
Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP
for such period (other than income taxes attributable to extraordinary, unusual
or nonrecurring gains or losses), Consolidated Interest Expense, amortization
expense (including write-off of deferred financing costs) and depreciation
expense and (iii) other non-cash items other than non-cash interest reducing
Consolidated Net Income (other than such items incurred in the ordinary course
of business consistent with past practice) less other non-cash items increasing
Consolidated Net Income (other than such items incurred in the ordinary course
of business consistent with past practice), all as determined on a consolidated
basis for such Person and its Restricted Subsidiaries in conformity with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four most
recent full fiscal quarters for which financial information is available (the
"Four Quarter Period") ending not more than 135 days prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such
Person for the Four Quarter Period. In addition to and without limitation of the
foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the Four Quarter Period to (1) the incurrence or repayment of
any Indebtedness of such Person or any of its Restricted Subsidiaries at any
time subsequent to the last day of the Four Quarter Period and on or prior to
the Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of the
Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA associated with such
Asset Acquisition) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Indebtedness or Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If such
Person or any of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or any Restricted
Subsidiary of such Person had directly incurred or otherwise assumed such
guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed
Charges," (1) interest on Indebtedness determined on a fluctuating basis as of
the Transaction Date and that will continue to be so determined thereafter shall
be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date, (2) if interest
on any Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate or other rates, then the interest rate in
effect on the
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Transaction Date will be deemed to have been in effect during the Four Quarter
Period, (3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
Interest Rate Agreements, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such Interest Rate Agreements
and (4) the permanent retirement of any Indebtedness during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date shall be given effect as if it occurred at
the beginning of such Four Quarter Period.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense and
(ii) the product of (x) the amount of all dividend payments on any series of
preferred stock of such Person (except dividends for such period which are
accrued but unpaid) times (y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective consolidated
federal, state and local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of all cash and non-cash interest expense (minus
amortization or write-off of deferred financing costs included in cash or
non-cash interest expense and minus interest income and capitalized interest)
with respect to all outstanding Indebtedness of such Person and its Restricted
Subsidiaries, including the net costs associated with Interest Rate Agreements,
for such period determined on a consolidated basis in conformity with GAAP.
Consolidated Interest Expense of the Company shall not include any prepayment
premiums or amortization of original issue discount or deferred financing costs.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided that there shall be excluded therefrom (a) gains and losses from Asset
Sales (without regard to the $5 million limitation set forth in the definition
thereof) or abandonments or reserves relating thereto, (b) items classified as
extraordinary, nonrecurring or unusual gains and losses, and the related tax
effects, (c) the net income (or loss) of any Person acquired in a pooling of
interests transaction accrued prior to the date it becomes a Restricted
Subsidiary of the Company or is merged or consolidated with the Company or any
Restricted Subsidiary, (d) the net income of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by contract, operation of law
or otherwise and (e) for the purpose of calculating Consolidated Net Income for
clause (iii)(w) of the first paragraph of the covenant "Limitation on Restricted
Payments," the net income (or loss) of any Person, other than a Restricted
Subsidiary, except to the extent of cash dividends or distributions (net of tax,
if applicable) paid to the Company or a Restricted Subsidiary of the Company by
such Person.
"Credit Agreement" means the Credit Agreement dated as of November 17,
1986, and amended and restated as of June 30, 1995, among the Company, the
financial institutions party thereto in their capacities as lenders thereunder,
and Bankers Trust Company as agent for the banks, as the same may be amended
from time to time, and any agreement evidencing the refinancing, modification,
replacement, renewal, restatement, refunding, deferral, extension, substitution,
supplement, reissuance or resale thereof, whether including any additional
obligors or with the same or any different agent or group of lenders.
"Currency Agreements" means without limitation any foreign exchange
contract, currency swap agreement, cross currency agreement, currency option
agreement, forward currency agreement, or other similar agreement or arrangement
entered into by the Company designed to protect the Company against fluctuations
in foreign exchange rates and not entered into for any other purpose.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means any Capital Stock that, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof, in whole or in part, on or prior to
the final maturity date of the Notes.
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"Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
"Indebtedness" means with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money, (ii) all indebtedness of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all indebtedness of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all indebtedness under any title retention
agreement, (v) all indebtedness of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations and (vii) all
indebtedness of any other Person of the type referred to in clauses (i) through
(vi) that is secured by any first Lien on any property or asset of such Person,
the amount of such indebtedness being deemed to be the lesser of the value of
such property or asset or the amount of the indebtedness so secured, but
excluding trade accounts payable arising in the ordinary course of business that
are not overdue in excess of 90 days or the subject of a good faith dispute.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement or
arrangement entered into by the Company designed to protect the Company against
fluctuations in interest rates and not entered into for any other purpose.
"Investment" means any transfer or delivery of cash, stock or other
property of value in exchange for indebtedness, stock or other security or
ownership interest by way of loan, advance (excluding any advances to officers
and employees in the ordinary course of business) or capital contribution. The
amount of any non-cash Investment (other than a Permitted Investment) or any
Investment in an Unrestricted Subsidiary shall be the fair market value of such
Investment, as determined in good faith by management of the Company unless the
fair market value of such Investment exceeds $10 million, in which case such
fair market value shall also be determined in good faith by the Board of
Directors or other equivalent governing body of the Company at the time such
Investment is made. For purposes of the covenant "Limitations on Restricted
Payments," (i) "Investment" in a Subsidiary shall include the portion
(proportionate to the Company's Capital Stock in such Subsidiary) of the fair
market value (as determined in good faith by the Board of Directors) of such
Subsidiary at the time that such Subsidiary is designated an Unrestricted
Subsidiary; provided that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's Capital Stock
in such Subsidiary) of the fair market value (as determined in good faith by the
Board of Directors) of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case determined in good faith by the Board of Directors.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Make-Whole Premium" with respect to a Note means an amount equal to the
greater of (i) 1.0% of the outstanding principal amount of such Note and (ii)
the excess of (a) the present value of the remaining interest, premium and
principal payments due on such Note as if such Note were redeemed on June 15,
2002, computed using a discount rate equal to the Treasury Rate plus 62.5 basis
points, over (b) the outstanding principal amount of such Note.
"Net Cash Proceeds" means, (i) with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable ((1)
including, without limitation, income taxes reasonably estimated to be actually
payable as a result of any disposition
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of property within two years of the date of disposition and (2) after taking
into account any reduction in tax liability due to available tax credits or
deductions and any tax sharing arrangements), (c) a reasonable reserve for the
after-tax cost of any indemnification obligations (fixed and/or contingent)
attributable to seller's indemnities to the purchaser undertaken by the Company
or any of its Restricted Subsidiaries in connection with such Asset Sale and (d)
repayment of Indebtedness that is required to be repaid in connection with such
Asset Sale or (ii) with respect to the sale of Capital Stock by any Person, the
aggregate net proceeds received by such Person after payment of expenses,
commissions, underwriting discounts and other similar charges incurred in
connection therewith, whether such proceeds are in cash or in property (valued
at the fair market value thereof, as determined in good faith by the Board of
Directors or other equivalent governing body of such Person, at the time of
receipt, whose determination shall be evidenced by a board resolution).
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Indebtedness" means, without duplication, (i) the Notes and any
Guarantees thereof, (ii) Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon (other than permanent reductions as a result of any
refinancing thereof permitted hereunder), (iii) Indebtedness of the Company and
its Restricted Subsidiaries incurred pursuant to the Credit Agreement in an
aggregate principal amount not to exceed $225 million, (iv) Indebtedness of the
Company and its Restricted Subsidiaries incurred pursuant to Interest Rate
Agreements, (v) intercompany Indebtedness by and among the Company and/or its
wholly owned Restricted Subsidiaries, (vi) Indebtedness of the Company and its
Restricted Subsidiaries (including Acquired Indebtedness) pursuant to pollution
control bonds and industrial revenue bonds not to exceed the sum of the
aggregate amount thereof outstanding on the Issue Date plus $25 million, (vii)
Indebtedness of the Company and its Restricted Subsidiaries (including Acquired
Indebtedness) evidenced by purchase money obligations and Capitalized Lease
Obligations not to exceed $25 million in any fiscal year; provided that any
portion of the $25 million that is not incurred in any fiscal year may be
carried over to successive fiscal years; provided, further, that the maximum
amount that may be incurred in any one fiscal year shall not exceed $50 million,
(viii) additional Indebtedness of the Company and its Restricted Subsidiaries
(including Acquired Indebtedness) incurred for any purpose not to exceed, at any
time outstanding, $200 million (that may be, but need not be, incurred in whole
or in part under the Credit Agreement), (ix) Indebtedness incurred pursuant to
the Trade Receivable Facility, (x) Indebtedness of the Company or its Restricted
Subsidiaries incurred under one or more instruments in connection with any
refinancing, modification, replacement, renewal, restatement, refunding,
deferral, extension, substitution, supplement, reissuance or resale (a
"refinancing") of existing or future Indebtedness of such entity; provided that
any such incurrence and related refinancing, together, shall not (1) result in
an increase in the aggregate principal amount of such Indebtedness (except to
the extent such increase is a result of an incurrence or refinancing of
additional Indebtedness otherwise permitted by the Indenture or such increase
does not exceed the amount of premiums, fees and expenses (including
underwriting discounts) relating to such refinancing, modification, replacement,
renewal, restatement, refunding, deferral, extension, substitution, supplement,
reissuance or resale of such existing or future Indebtedness) of the Company and
its Restricted Subsidiaries and (2) create Indebtedness where the Weighted
Average Life to Maturity at the time of such refunded, refinanced, modified,
replaced, renewed, restated, deferred, extended, substituted, supplemented,
reissued or resold Indebtedness is incurred is less than the Weighted Average
Life to Maturity of the Indebtedness being refunded, refinanced, modified,
replaced, renewed, restated, deferred, extended, substituted, supplemented,
reissued or resold; and provided, further, that with respect to the refinancing
of Indebtedness incurred pursuant to clauses (v), (vi), (vii), (xvi) and (xvii),
such Indebtedness may only be refinanced with Indebtedness permitted to be
incurred under such respective clause, (xi) Indebtedness of the Company and its
Restricted Subsidiaries arising in connection with the acquisition or
refinancing of property so long as recourse with respect to such Indebtedness is
limited only to the property being acquired or refinanced or any amendment,
restatement, deferral, extension, modification, refinancing, refunding, renewal,
replacement, substitution, supplement, reissuance or resale thereof so long as
recourse is limited to the property being refinanced, (xii) Indebtedness of the
Company and its Restricted Subsidiaries incurred after the Issue Date relating
to letters of credit available or outstanding under the Credit Agreement (or any
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successor thereto), (xiii) surety obligations of the Company and its Restricted
Subsidiaries entered into in the ordinary course of business, (xiv) Indebtedness
of the Company and its Restricted Subsidiaries incurred to finance the purchase
of insurance in the ordinary course of business, (xv) Indebtedness of the
Company and its Restricted Subsidiaries incurred arising from the honoring by a
bank or other financial institution of a check or draft inadvertently drawn
against insufficient funds in the ordinary course of business, provided that
such Indebtedness is extinguished within two business days of notice of any such
incurrence, (xvi) Indebtedness of the Company and its Restricted Subsidiaries
arising from guarantees of loans and advances by third parties to employees and
officers of the Company or its subsidiaries, not to exceed $1 million in the
aggregate, (xvii) Indebtedness of the Company and its Restricted Subsidiaries
arising from the repurchase of Common Stock not to exceed $4 million (xviii)
Indebtedness of the Company and its Restricted Subsidiaries arising from
Currency Agreements and Commodity Agreements, (xix) the 12 3/4% Debentures and
(xx) the Old Notes.
"Permitted Investments" means in the case of the Company or its Restricted
Subsidiaries, (i) an Investment related to the business of the Company and its
Restricted Subsidiaries as it is conducted on the Issue Date, including, but not
limited to, subsidiaries, joint ventures or other business alliances formed in
the ordinary course of business, (ii) Investments in the Company by any
Restricted Subsidiary or Investments by the Company or any Restricted Subsidiary
(including acquisitions) in any other Person, if after giving effect of any such
Investment, such Person would be a wholly owned Restricted Subsidiary of the
Company, (iii) Investments in cash and Cash Equivalents, (iv) Investments in
Productive Assets, (v) Investments in any Person in connection with the Trade
Receivable Facility, (vi) Investments existing on the date of this Indenture,
(vii) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries not in excess of $1 million at any one time outstanding,
(viii) accounts receivable created or acquired in the ordinary course of
business, (ix) Interest Rate Agreements, Currency Agreements and Commodity
Agreements entered into in the ordinary course of the Company's business and
otherwise in compliance with this Indenture, (x) Investments in Unrestricted
Subsidiaries in an amount at any one time outstanding not to exceed $25 million,
(xi) guarantees by the Company of Indebtedness otherwise permitted to be
incurred by Restricted Subsidiaries of the Company under this Indenture and
(xii) Investments received by the Company or its Restricted Subsidiaries as
consideration for asset sales, including Asset Sales; provided in the case of an
Asset Sale, such Asset Sale is effected in compliance with the covenant
described above under "Certain Covenants -- Limitation on Asset Sales."
"Permitted Liens" means (i) Liens for taxes, assessments and governmental
charges to the extent not required to be paid, (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other like Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by an appropriate
process of law, and for which a reserve or other appropriate provision, if any,
as shall be required by GAAP shall have been made, (iii) pledges or deposits in
the ordinary course of business to secure lease obligations or nondelinquent
obligations under workers' compensation, unemployment insurance or similar
legislation, (iv) Liens to secure the performance of public statutory
obligations that are not delinquent, appeal bonds, performance bonds or other
obligations of a like nature (other than for borrowed money), (v) easements,
rights-of-way, restrictions, minor defects or irregularities in title and other
similar charges or encumbrances not interfering in any material respect with the
business of the Company or any of its Subsidiaries, (vi) Liens upon specific
items of inventory or other goods and proceeds of any Person securing such
Person's obligations in respect of bankers' acceptances issued or created for
the account of such Person to facilitate the purchase, shipment or storage of
such inventory or other goods in the ordinary course of business, (vii) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof, (viii) Liens in favor of custom and revenue
authorities arising as a matter of law to secure payment of nondelinquent
customs duties in connection with the importation of goods, (ix) judgment and
attachment Liens not giving rise to a Default or Event of Default, (x) leases or
subleases granted to others not interfering in any material respect with the
business of the Company or any Subsidiary, (xi) Liens encumbering customary
initial deposits and margin deposits, and other Liens incurred in the ordinary
course of business that are within the general parameters customary in the
industry, in each case securing Indebtedness under Interest Rate Agreements,
Currency Agreements,
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Commodity Agreements and forward contracts, option futures contracts, futures
options or similar agreements or arrangements designed to protect the Company or
any Subsidiary from fluctuations in the price of commodities, (xii) Liens
encumbering deposits made in the ordinary course of business to secure
nondelinquent obligations arising from statutory, regulatory, contractual or
warranty requirements of the Company or its Subsidiaries for which a reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made, (xiii) Liens arising out of consignment or similar arrangements for
the sale of goods entered into by the Company or any Subsidiary in the ordinary
course of business in accordance with industry practice, (xiv) any interest or
title of a lessor in the property subject to any lease, whether characterized as
capitalized or operating, other than any such interest or title resulting from
or arising out of default by the Company or any Subsidiary of its obligations
under such lease, (xv) Liens arising from filing UCC financing statements for
precautionary purposes in the connection with true leases of personal property
that are otherwise permitted under this Indenture and under which the Company or
any Subsidiary is lessee, (xvi) Liens on property of a Person existing at the
time such Person is acquired by, merged into or consolidated with the Company or
any Restricted Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (xvii) Liens to secure the
payment of all or a part of the purchase price of property or assets acquired or
constructed in the ordinary course of business on or after the date of this
Indenture, provided that (a) such property or assets are used in the same or
similar line of business as the Company was engaged in on the Issue Date, (b) at
the time of incurrence of any such Lien, the aggregate principal amount of the
obligations secured by such Lien shall not exceed the lesser of the cost or fair
market value of the assets or property (or portions thereof) so acquired or
constructed, (c) each such Lien shall encumber only the assets or property (or
portions thereof) so acquired or constructed and shall be attached to such
property within 180 days of the purchase or construction thereof and (d) and
Indebtedness secured by such Lien shall have been permitted to be incurred under
the covenant "Limitation on Incurrence of Additional Indebtedness," and (xviii)
Liens of landlords or of mortgagees of landlords arising by operation of law,
provided that the rental payments secured thereby are not yet due and payable;
(xix) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that (a) are
not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of business)
and (b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of business by
the Company or such Restricted Subsidiary.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Productive Assets" means assets (including Capital Stock) of a kind used
or usable in the business of the Company and its Restricted Subsidiaries as it
is conducted on the Issue Date.
"Qualified Capital Stock" means any stock that is not Disqualified Capital
Stock.
"Restricted Subsidiary" means any direct or indirect Subsidiary of any
Person that is not an Unrestricted Subsidiary of such Person.
"Restricted Subsidiary Indebtedness" means (a) Indebtedness (other than
Indebtedness under any Trade Receivable Facility, intercompany Indebtedness or
Indebtedness outstanding on the Issue Date, including any refinancing of
Indebtedness outstanding on the Issue Date to the extent it does not increase
the principal amount of such Indebtedness) incurred by a Restricted Subsidiary
(other than a Subsidiary Guarantor), or (b) the direct or indirect assumption,
guarantee (other than a Guarantee) or other obligation of any Restricted
Subsidiary (other than a Subsidiary Guarantor) for any Indebtedness of the
Company or any other Restricted Subsidiary by way of the pledge of any
intercompany note or otherwise, or (c) the total amount of committed borrowings
under revolving credit facilities under which the Restricted Subsidiary (other
than a Subsidiary Guarantor) is a borrower or guarantor, but "Restricted
Subsidiary Indebtedness" shall not include any Indebtedness of the Restricted
Subsidiary evidenced by purchase money obligations or Capitalized Lease
Obligations provided for under clause (vii) and Indebtedness provided for under
clause (xi)
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of the definition of Permitted Indebtedness in an aggregate amount not to exceed
$75 million for all Restricted Subsidiaries.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest to elect the
governing body or Persons thereof under ordinary circumstances is at the time,
directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means each of the Company's Restricted Subsidiaries
that becomes a guarantor of the Notes by executing a supplemental indenture in
which such Restricted Subsidiary agrees to be bound by the terms of the
Indenture; provided that any person constituting a Subsidiary Guarantor as
described above shall cease to constitute a Subsidiary Guarantor when its
respective Subsidiary Guarantee is released in accordance with the terms
thereof.
"Total Tangible Assets" means the Company's total consolidated assets minus
all intangible assets, determined in accordance with GAAP.
"Trade Receivable Facility" means the arrangements that have been or may be
entered into by the Company or one or more of its Restricted Subsidiaries
pursuant to which the Company or one or more of its Restricted Subsidiaries may
either transfer to any other Person or grant a security interest in any trade
receivables (whether now existing or arising in the future) and any assets
related to such trade receivables including, without limitation, all collateral
securing such trade receivables and all material contracts and all guarantees or
other Obligations in respect of such trade receivables of the Company or one or
more of its Restricted Subsidiaries.
"Unrestricted Subsidiary" means any Subsidiary of the Company, whether
existing, newly formed or newly acquired, designated as an Unrestricted
Subsidiary by the Board of Directors of the Company and any Subsidiary of an
Unrestricted Subsidiary; provided, however, that at the time of such designation
(i) no Default or Event of Default shall have occurred and be continuing, (ii)
no portion of any Indebtedness or any other obligation (contingent or otherwise)
of such Subsidiary (a) is guaranteed by, or is otherwise the subject of credit
support provided by the Company or any of its Restricted Subsidiaries, (b) is
recourse to or obligates the Company or any of its Restricted Subsidiaries in
any way or (c) subjects any property or asset of the Company or any of its
Restricted Subsidiaries directly or indirectly, contingently or otherwise, to
the satisfaction of such Indebtedness or other obligation, (iii) neither the
Company nor any of its Restricted Subsidiaries has any contract, or agreement,
arrangement or understanding with such Subsidiary other than on terms as
favorable to the Company or such Restricted Subsidiary as those that might be
obtained at the time from Persons that are not Affiliates of the Company and
(iv) neither the Company nor any of its Restricted Subsidiaries has any
obligations (a) to subscribe for additional shares of Capital Stock of such
Subsidiary or (b) to maintain or preserve such Subsidiary's financial condition
or to cause such Subsidiary achieve certain levels of operating results. Any
such designation by the Company's Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified certificate stating that such
designation complies with the foregoing conditions. The Company's Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing, including, without limitation, under the covenants described above
under the caption "Limitations on Incurrence of Indebtedness" assuming the
incurrence by the Company and its Restricted Subsidiaries at the time of such
designation of all existing Indebtedness of the Unrestricted Subsidiary to be so
designated as a Restricted Subsidiary. In the event of any disposition involving
the Company in which the Company is not the Surviving Person, the Board of
Directors of the Surviving Person may (x) prior to such disposition, designate
any of its Subsidiaries, and any of the
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Company's Subsidiaries being acquired pursuant to such disposition that are not
Restricted Subsidiaries, as Unrestricted Subsidiaries, and (y) after such
disposition, designate any of its direct or indirect Subsidiaries as an
Unrestricted Subsidiary under the same conditions and in the same manner as the
Company under the terms of the Indenture.
"U.S. Legal Tender" means such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"wholly owned Restricted Subsidiary" means any Restricted Subsidiary of
which all of the outstanding voting securities or other equity ownership
interest (other than directors qualifying or similar shares required to be held
by third parties in accordance with applicable law, not in any event to exceed 5
percent of the total outstanding voting securities) are owned by the Company or
any wholly owned Restricted Subsidiary of the Company.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes initially will be
represented by one or more permanent global certificates in definitive, fully
registered form (the "Global Note"). The Global Note will be deposited on the
date of issue with, or on behalf of, The Depository Trust Company, New York, New
York ("DTC") and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to foreign purchasers or
(ii) held by QIBs who elect to take physical delivery of their certificates
instead of holding their interest through the Global Note (and which are thus
ineligible to trade through DTC) (collectively referred to herein as the
"Non-Global Purchasers") will be issued in registered form (the "Certificated
Note"). Upon the transfer to a QIB of any Certificated Note initially issued to
a Non-Global Purchaser, such Certificated Note will, unless the transferee
requests otherwise or the Global Note has previously been exchanged in whole for
Certificated Notes, be exchanged for an interest in the Global Note.
The Global Note. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. QIBs may hold their interests in the Global
Note directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in any of the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided by the Indenture for the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of
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the Company, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any records to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Note as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in the Global Note held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certified Note for any reason, including
to sell Notes to persons in states which require physical delivery of the Notes,
or to pledge such securities, such holder must transfer its interest in the
Global Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Note
for Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Notes. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Note and a successor depositary is not appointed
by the Company within 90 days, Certificated Notes will be issued in exchange for
the Global Note.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Initial Notes were originally sold by the Company to the Initial
Purchasers pursuant to the Purchase Agreement dated June 5, 1997. The Initial
Purchasers subsequently resold the Initial Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. As a condition to the
closing under the Purchase Agreement, the Company and the Initial Purchasers
entered into the Registration Rights Agreement on June 12, 1997 (the "Issue
Date") pursuant to which the Company agreed, for the benefit of the holders,
that it will, at its own cost, (i) within 60 days after the Issue Date, file a
registration statement (the "Exchange Offer Registration Statement") with the
Commission with respect to the Exchange Offer, (ii) use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act within 150 days after the Issue Date and (iii) use its best
efforts to consummate the Exchange Offer within 180 days after the Issue Date.
Upon the Exchange Offer Registration Statement being declared effective, the
Company will offer the Exchange Notes in exchange for surrender of the Initial
Notes. The Company will keep the Exchange Offer open for not less than 20
business days (or longer if required by applicable law) after the date the
notice of the Exchange Offer is mailed to the holders of the Initial Notes. For
each of the Initial Notes surrendered pursuant to the Exchange Offer, the holder
who surrendered such Initial Note will receive an Exchange Note having a
principal amount equal to that of the surrendered Initial Note. Interest on each
Exchange Note will accrue from the last interest payment date on which interest
was paid on the Initial Note surrendered in exchange therefor or, if no interest
has been paid on such Initial Note, from the Issue Date. Under existing
Commission interpretations, the Exchange Notes would be freely transferable by
holders thereof other than affiliates of the Company after the Exchange Offer
without further registration under the Securities Act if the holder of the
Exchange Notes represents that it is acquiring the Exchange Notes in the
ordinary course of business, that it has no arrangement or understanding with
any person to participate in the distribution of the Exchange Notes and that it
is not an affiliate of the Company, as such terms are interpreted by the
Commission; provided that broker-dealers ("Participating Broker-Dealers")
receiving Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that the Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Initial Notes)
with the prospectus contained in the Exchange Offer Registration Statement. The
Company has agreed for a period of 180 days after consummation of the Exchange
Offer to make available a prospectus meeting requirements of the Securities Act
to Participating Broker-Dealers and other persons, if any, with similar
prospectus delivery requirements for use in connection with any resale of such
Exchange Notes.
Each holder who wishes to exchange its Initial Notes for Exchange Notes in
the Exchange Offer will be required to represent that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business and that
at the time of the commencement of the Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
affiliate of the Company.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
applicable Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Initial Notes that were
acquired as a result of market-making activities or other trading activities, it
will be required to acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days after the Issue
Date, or, under certain circumstances, if the Initial Purchasers shall so
request, the Company will at its cost, (a) as promptly as practicable, file a
shelf registration statement covering resales of the Initial Notes (a "Shelf
Registration Statement"), (b) use its best efforts to cause such Shelf
Registration Statement to be declared effective under the Securities Act and (c)
use its best efforts to keep effective such Shelf Registration Statement until
the earlier of two years after the Issue Date and such time as all of the
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applicable Initial Notes have been sold thereunder. The Company will, in the
event of the filing of a Shelf Registration Statement, provide to each holder of
the Initial Notes copies of the prospectus which is a part of such Shelf
Registration Statement, notify each such holder when such Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Initial Notes. A holder that sells its
Initial Notes pursuant to a Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
Although the Company intends to file the registration statement described
above, there can be no assurance that such registration statement will be filed,
or, if filed, that it will become effective. If the Company fails to comply with
the above provisions or if such registration statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable with respect to the Initial Notes as follows:
(i) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 60 days following the Issue Date, Additional
Interest shall accrue on the Initial Notes over and above the stated
interest at a rate of 0.50% per annum for the first 90 days commencing on
the 61st day after the Issue Date, such Additional Interest rate increasing
by an additional 0.50% per annum at the beginning of each subsequent 90-day
period;
(ii) if the Exchange Offer Registration Statement or Shelf
Registration Statement is not declared effective within 150 days following
the Issue Date, Additional Interest shall accrue on the Initial Notes over
and above the stated interest at a rate of 0.50% per annum for the first 90
days commencing on the 151st day after the Issue Date, such Additional
Interest rate increasing by an additional 0.50% per annum at the beginning
of each subsequent 90-day period; or
(iii) if (A) the Company has not exchanged all Initial Notes validly
tendered in accordance with the terms of the Exchange Offer on or prior to
180 days after the Issue Date or (B) the Exchange Offer Registration
Statement ceases to be effective at any time prior to the time that the
Exchange Offer is consummated or (C) if applicable, the Shelf Registration
Statement has been declared effective and such Shelf Registration Statement
ceases to be effective at any time prior to the third anniversary of the
Issue Date (unless all the Initial Notes have been sold thereunder), then
Additional Interest shall accrue on the Initial Notes over and above the
stated interest at a rate of 0.50% per annum for the first 90 days
commencing on (x) the 181st day after the Issue Date with respect to the
Initial Notes validly tendered and not exchanged by the Company, in the
case of (A) above, or (y) the day the Exchange Offer Registration Statement
ceases to be effective or usable for its intended purpose in the case of
(B) above, or (z) the day such Shelf Registration Statement ceases to be
effective in the case of (C) above, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period;
provided, however, that the Additional Interest rate on the Initial Notes may
not exceed in the aggregate 1.0% per annum; and provided further, that (1) upon
the filing of the Exchange Offer Registration Statement or Shelf Registration
Statement (in the case of clause (i) above), (2) upon the effectiveness of the
Exchange Offer Registration Statement or Shelf Registration Statement (in the
case of (ii) above), or (3) upon the exchange of Exchange Notes for all Initial
Notes tendered (in the case of clause (iii)(A) above), or upon the effectiveness
of the Exchange Offer Registration Statement which had ceased to remain
effective in the case of clause (iii)(B) above, or upon the effectiveness of the
Shelf Registration Statement which had ceased to remain effective (in the case
of clause (iii)(C) above), Additional Interest on the Initial Notes as a result
of such clause (or the relevant subclause thereof), as the case may be, shall
cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment dates
as the Initial Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Initial Notes multiplied by a fraction, the numerator of which is the number
of days such Additional Interest rate was
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<PAGE> 65
applicable during such period (determined on the basis of a 360-day year
comprised of twelve 30-day months), and the denominator of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
Following the consummation of the Exchange Offer, holders of the Initial
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Initial Notes will not have any further registration rights and
such Initial Notes will continue to be subject to certain transfer restrictions.
Accordingly, the liquidity of the market for such Initial Notes could be
adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Initial
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Initial Notes accepted in the Exchange Offer. Holders may tender some or all of
their Initial Notes pursuant to the Exchange Offer. However, Initial Notes may
be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Initial Notes except that (i) the Exchange Notes bear a Series B
designation and a different CUSIP Number from the Initial Notes, (ii) the
issuance of the Exchange Notes has been registered under the Securities Act and
hence the Exchange Notes will not bear legends restricting the transfer thereof
and (iii) the holders of the Exchange Notes will not be entitled to certain
rights under the Registration Rights Agreement, including the provisions
providing for an increase in the interest rate on the Initial Notes in certain
circumstances relating to the timing of the Exchange Offer, all of which rights
will terminate when the Exchange Offer is terminated. The Exchange Notes will
evidence the same debt as the Initial Notes and will be entitled to the benefits
of the Indenture.
As of the date of this Prospectus, $225,000,000 aggregate principal amount
of Initial Notes were outstanding. This Prospectus and the Letter of Transmittal
are being mailed to persons who were holders of record of Initial Notes on the
close of business on the date of this Prospectus.
Holders of Initial Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Initial Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Initial Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Initial Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Initial Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Initial
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the Exchange Offer. See "-- Fees and Expenses."
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<PAGE> 66
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 8, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Initial Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Initial Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes. Such interest will be paid with the first interest payment on the
Exchange Notes on December 15, 1997. Interest on the Initial Notes accepted for
exchange will cease to accrue upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each June 15 and
December 15, commencing on December 15, 1997.
PROCEDURES FOR TENDERING
Only a holder of Initial Notes may tender such Initial Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Initial Notes and any other required documents, to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively, the Initial Notes, Letter of Transmittal and other required
documents must be completed and received by the Exchange Agent at the address
set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time,
on the Expiration Date. Delivery of the Initial Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the third paragraph under the
heading "-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF INITIAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
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<PAGE> 67
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Initial Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Initial Notes listed therein, such Initial Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Initial Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Initial Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Initial Notes at the book-entry transfer facility, the DTC (the "Book-Entry
Transfer Facility"), for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in the Book-Entry Transfer Facility's system may make book-entry
delivery of Initial Notes by causing such Book-Entry Transfer Facility to
transfer such Initial Notes into the Exchange Agent's account with respect to
the Initial Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Initial Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee and all other
required documents must in each case be transmitted to and received or confirmed
by the Exchange Agent at its address set forth below on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Initial Notes and withdrawal of tendered
Initial Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Initial Notes not properly tendered or any Initial Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in its sole discretion
to waive any defects, irregularities or conditions of tender as to particular
Initial Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Initial Notes must be cured within such time as
the Issuer shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Initial Notes, neither the
Issuer, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Initial Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Initial Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available, (ii) who cannot deliver their Initial Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent or
(iii) who cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Initial Notes and the principal amount of Initial Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Initial Notes (or a confirmation of
book-entry transfer of such Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Initial Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Initial Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Initial Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Initial Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Initial Notes to be
withdrawn (the "Depositor"), (ii) identify the Initial Notes to be withdrawn
(including the certificate number(s) and principal amount of such Initial Notes,
or, in the case of Initial Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited),
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Initial Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Initial Notes register the
transfer of such Initial Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Initial Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Initial Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Initial Notes so withdrawn are validly
retendered. Any Initial Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Initial Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
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<PAGE> 69
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Initial
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Initial Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Initial Notes and
return all tendered Initial Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Initial Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw such
Initial Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Initial Notes which have not been withdrawn.
EXCHANGE AGENT
The State Street Bank and Trust Company has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<C> <C>
By Mail: Overnight Courier:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02110
Attention: Corporate Trust Department Attention: Corporate Trust Department
By Hand: in New York (as Drop Agent) By Hand: in Boston
State Street Bank and Trust Company, N.A. State Street Bank and Trust Company
61 Broadway Two International Plaza
Concourse Level, Corporate Trust Window Fourth Floor, Corporate Trust
New York, New York 10006 Boston, Massachusetts 02110
Facsimile Transmission: Confirm by Telephone:
(617) 664-5739 (617) 664-5590
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
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FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The expenses incurred in connection with the Exchange Offer will be paid by
the Company. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Initial Notes, which is face value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
will be expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Initial Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Initial
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) so long as the Initial Notes are eligible for resale pursuant
to Rule 144A, to a person inside the United States whom the seller reasonably
believes is a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act in a transaction meeting the requirements of Rule 144A,
in accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Initial Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Initial Notes, where such
Initial Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
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<PAGE> 71
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives a New Note for
its own account in exchange for Initial Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based on the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conditions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders. Certain holders (including
insurance companies, tax-exempt organizations, financial institutions.
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. The Company recommends that each holder consult such holder's own tax
advisor as to the particular tax consequences of exchanging such holder's
Initial Notes for Exchange Notes, including the applicability and effect of any
state, local or foreign tax laws.
The Company believes that the exchange of Initial Notes for Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for federal
income tax purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Initial Notes. Rather, the Exchange Notes
received by a holder will be treated as a continuation of the Initial Notes in
the hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging Initial Notes for Exchange Notes pursuant to
the Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Initial Notes where such Initial Notes were acquired as
a result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, they will
make this Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
December 8, 1997 (90 days after the commencement of the Exchange Offer), all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such
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<PAGE> 72
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
Participating Broker-Dealer and/or the purchasers of any such Exchange Notes.
Any Participating Broker-Dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
EXPERTS
The consolidated financial statements as of September 30, 1996 and 1995 and
for each of the three years in the period ended September 30, 1996 included and
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered hereby will be
passed upon for the Company by Kirkland & Ellis, Chicago, Illinois.
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<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent Auditors' Report -- Deloitte & Touche LLP....... F-2
Consolidated Balance Sheets as of September 30, 1996 and
1995...................................................... F-3
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1996, 1995 and 1994............. F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Balance Sheets as of June
30, 1997 and September 30, 1996........................... F-28
Unaudited Consolidated Statements of Operations for the nine
months ended June 30, 1997 and 1996....................... F-29
Unaudited Consolidated Statements of Cash Flows for the nine
months ended June 30, 1997 and 1996....................... F-30
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-31
</TABLE>
F-1
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
Gaylord Container Corporation:
We have audited the accompanying consolidated balance sheets of Gaylord
Container Corporation and its subsidiaries (the Company) at September 30, 1996
and 1995 and the related consolidated statements of operations, of stockholders'
equity and of cash flows for each of the three years in the period ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at September 30,
1996 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 4, 1996
F-2
<PAGE> 75
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 39.2 $ 32.5
Trade receivables (less allowances of $6.9 million and
$6.5 million, respectively) (Note 9)................... 111.0 140.0
Inventories (Note 5)...................................... 70.4 73.1
Prepaid expenses.......................................... 2.2 2.8
Deferred income taxes (Note 8)............................ 5.1 49.6
Other..................................................... 8.2 8.3
------ ------
Total current assets................................... 236.1 306.3
Property -- net (Notes 6 and 14)............................ 612.3 640.0
Other assets:
Deferred charges (Note 7)................................. 18.6 24.0
Deferred income taxes (Note 8)............................ 16.8 --
Other (Notes 4 and 9)..................................... 49.2 17.7
------ ------
Total assets........................................... $933.0 $988.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 9)............. $ 11.3 $ 15.6
Trade payables............................................ 60.8 51.7
Accrued interest payable.................................. 27.3 9.7
Accrued and other liabilities (Note 10)................... 66.9 72.9
------ ------
Total current liabilities.............................. 166.3 149.9
Long-term debt (Note 9)..................................... 623.1 671.5
Other long-term liabilities (Note 10)....................... 29.1 27.5
Deferred income taxes (Note 8).............................. -- 25.9
Commitments and contingencies (Note 16)..................... -- --
Stockholders' equity (Notes 11, 12 and 13)
Class A common stock...................................... -- --
Capital in excess of par value............................ 173.5 172.6
Retained deficit (Note 9)................................. (46.1) (54.7)
Common stock in treasury -- at cost....................... (11.7) (0.4)
Recognition of minimum pension liability (Note 15)........ (1.2) (4.3)
------ ------
Total stockholders' equity............................. 114.5 113.2
------ ------
Total liabilities and stockholders' equity........... $933.0 $988.0
====== ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 76
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
------ -------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $922.0 $1,051.4 $784.4
Cost of goods sold.......................................... 716.2 755.0 691.4
------ -------- ------
Gross margin................................................ 205.8 296.4 93.0
Selling and administrative costs............................ (99.1) (95.5) (81.0)
Non-recurring operating charges (Note 2).................... (8.1) (5.4) (15.5)
------ -------- ------
Operating earnings (loss).............................. 98.6 195.5 (3.5)
Interest expense -- net (Note 9)............................ (78.3) (86.1) (80.3)
Other income (expense) -- net............................... (0.2) 0.6 (0.2)
------ -------- ------
Income (loss) before income taxes........................... 20.1 110.0 (84.0)
Income tax (provision) benefit (Note 8)..................... (8.3) 24.2 --
------ -------- ------
Income (loss) before extraordinary item..................... 11.8 134.2 (84.0)
Extraordinary loss (Note 3)................................. (3.2) -- --
------ -------- ------
Net income (loss)...................................... $ 8.6 $ 134.2 $(84.0)
====== ======== ======
Earnings per common and common equivalent share:
Income (loss) before extraordinary item................... $ 0.22 $ 2.44 $(1.57)
Extraordinary loss (Note 3)............................... (0.06) -- --
------ -------- ------
Net income (loss)...................................... $ 0.16 $ 2.44 $(1.57)
====== ======== ======
Average number of common and common equivalent shares
outstanding............................................... 54.7 55.1 53.6
====== ======== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 77
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------
CLASS A CLASS B CAPITAL IN RETAINED TREASURY STOCK
-------------------- -------------------- EXCESS OF EARNINGS -------------------
SHARES DOLLARS SHARES DOLLARS PAR VALUE (DEFICIT) SHARES DOLLARS
------ ------- ------ ------- ---------- --------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993.... 47,510,789 $-- 5,951,427 $-- $169.4 $(104.9) 85,700 $ (0.8)
Net loss......................... -- -- -- -- -- (84.0) -- --
Options exercised................ 124,416 -- -- -- 0.7 -- -- --
Restricted stock -- net.......... 190,500 -- -- -- -- -- -- --
Adjustment of minimum pension
liability...................... -- -- -- -- -- -- -- --
Other............................ 685,154 -- (685,154) -- 0.4 -- (2,722) --
---------- --- ---------- --- ------ ------- --------- ------
Balance at September 30, 1994.... 48,510,859 -- 5,266,273 -- 170.5 (188.9) 82,978 (0.8)
Net income....................... -- -- -- -- -- 134.2 -- --
Options exercised................ 306,648 -- -- -- 1.5 -- -- --
Mandatory conversion of Class B
Common Stock (Note 12)......... 5,250,082 -- (5,250,082) -- -- -- -- --
Restricted stock -- net.......... 40,750 -- -- -- -- -- -- --
Adjustment of minimum pension
liability...................... -- -- -- -- -- -- -- --
Other............................ 16,191 -- (16,191) -- 0.6 -- (35,975) 0.4
---------- --- ---------- --- ------ ------- --------- ------
Balance at September 30, 1995.... 54,124,530 -- -- -- 172.6 (54.7) 47,003 (0.4)
Net income....................... -- -- -- -- -- 8.6 -- --
Stock repurchased................ -- -- -- -- -- -- 1,570,500 (11.6)
Options exercised................ 122,981 -- -- -- 0.6 -- -- --
Restricted stock -- net.......... 22,500 -- -- -- -- -- -- --
Adjustment of minimum pension
liability...................... -- -- -- -- -- -- -- --
Other............................ -- -- -- -- 0.3 -- (35,725) 0.3
---------- --- ---------- --- ------ ------- --------- ------
Balance at September 30, 1996.... 54,270,011 $-- -- $-- $173.5 $ (46.1) 1,581,778 $(11.7)
========== === ========== === ====== ======= ========= ======
<CAPTION>
TOTAL
MINIMUM STOCKHOLDERS'
PENSION EQUITY
LIABILITY (DEFICIT)
--------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Balance at September 30, 1993.... $(10.1) $ 53.6
Net loss......................... -- (84.0)
Options exercised................ -- 0.7
Restricted stock -- net.......... -- --
Adjustment of minimum pension
liability...................... 5.5 5.5
Other............................ -- 0.4
------ ------
Balance at September 30, 1994.... (4.6) (23.8)
Net income....................... -- 134.2
Options exercised................ -- 1.5
Mandatory conversion of Class B
Common Stock (Note 12)......... -- --
Restricted stock -- net.......... -- --
Adjustment of minimum pension
liability...................... 0.3 0.3
Other............................ -- 1.0
------ ------
Balance at September 30, 1995.... (4.3) 113.2
Net income....................... -- 8.6
Stock repurchased................ -- (11.6)
Options exercised................ -- 0.6
Restricted stock -- net.......... -- --
Adjustment of minimum pension
liability...................... 3.1 3.1
Other............................ -- 0.6
------ ------
Balance at September 30, 1996.... $ (1.2) $114.5
====== ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 78
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Income (loss) before extraordinary item..................... $ 11.8 $ 134.2 $(84.0)
Adjustments to reconcile income (loss) to net cash provided
by operations:
Depreciation and amortization............................. 64.5 64.8 61.2
Non-cash interest expense................................. 31.2 46.7 41.3
Deferred income taxes..................................... 1.8 (28.0) --
Non-recurring charges..................................... 8.1 5.4 --
Asset write-down.......................................... -- -- 13.4
Acquisition restructuring expenditures.................... (0.7) (1.0) (2.9)
Change in current assets and liabilities, excluding
acquisitions and dispositions:
Receivables............................................ 29.4 (18.2) (18.6)
Inventories............................................ (1.7) (13.5) 1.6
Prepaid expenses and other current assets.............. 0.5 (3.2) (0.6)
Accounts payable and other accrued liabilities......... 21.3 8.2 15.6
Other -- net.............................................. (1.8) (1.2) 2.7
------- ------- ------
Net cash provided by operations............................. 164.4 194.2 29.7
------- ------- ------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures...................................... (54.8) (58.9) (40.4)
Capitalized interest...................................... (0.8) (2.3) (0.9)
Proceeds from asset sales................................. 2.6 3.5 4.5
Other investments -- net.................................. (0.5) (3.6) 1.9
------- ------- ------
Net cash used for investments............................... (53.5) (61.3) (34.9)
------- ------- ------
CASH FLOWS FROM FINANCING:
Treasury stock purchases.................................. (11.6) -- --
Early extinguishment of debt.............................. (77.7) (89.9) --
Senior debt repayments.................................... (15.6) (25.8) (5.4)
Debt issuance costs....................................... -- (3.4) --
Other financing -- net.................................... 0.7 1.3 0.4
------- ------- ------
Net cash used for financing................................. (104.2) (117.8) (5.0)
------- ------- ------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. 6.7 15.1 (10.2)
Cash and equivalents, beginning of year..................... 32.5 17.4 27.6
------- ------- ------
Cash and equivalents, end of year........................... $ 39.2 $ 32.5 $ 17.4
======= ======= ======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 79
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Gaylord Container Corporation (including its
subsidiaries, the Company) is engaged in the integrated production, conversion
and sale of paper packaging products. The Company is a major national
manufacturer and distributor of corrugated containers, corrugated sheets,
containerboard, unbleached kraft paper, multiwall bags and, through a wholly
owned, independently operated subsidiary, specialty chemicals. Corrugated
containers and sheets, multiwall bags and solid fibre products collectively
represent approximately 85 percent of the Company's net sales while
containerboard and unbleached kraft paper represent approximately 15 percent of
such sales. Corrugated containers are produced to customer order primarily for
use in shipping their products and as point-of-sale displays. Containerboard,
consisting of linerboard and corrugating medium, is the principal raw material
used to manufacture corrugated containers and corrugated sheets. The Company
also produces unbleached kraft paper which it converts into multiwall bags or,
through a joint venture, into grocery bags and sacks or sells to independent
converters.
The Company's facilities, which are located throughout the United States,
consist of three containerboard and paper mills, 14 corrugated container plants,
three sheet feeder plants, two multiwall bag plants, a preprint and graphics
center, a cogeneration facility and, through a wholly owned, independently
operated subsidiary, a specialty chemical facility.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from such estimates.
Summary of Significant Accounting Policies -- The Company's accounting policies
conform to generally accepted accounting principles. Significant policies
followed are described below:
Basis of Consolidation -- The consolidated financial statements at
September 30, 1996 and 1995 and for the years ended September 30, 1996 (Fiscal
1996), September 30, 1995 (Fiscal 1995) and September 30, 1994 (Fiscal 1994)
include all of the accounts of the Company after elimination of intercompany
transactions and balances. The Company operates on a 52/53-week fiscal year.
Fiscal 1996 is a 53-week fiscal year, while Fiscal 1995 and Fiscal 1994 are
52-week fiscal years. Certain amounts for Fiscal 1995 and Fiscal 1994 have been
reclassified to conform with the current year presentation.
Revenue Recognition -- Sales are recognized when the Company's products are
shipped. Shipments to companies with reciprocal purchase agreements (Exchange
Partners) are not recognized as sale transactions in the statement of
operations. In the balance sheet, however, trade receivables due from and trade
payables due to Exchange Partners are not eliminated because no contractual
right of offset exists.
Cash and Equivalents -- The Company considers all highly liquid debt
instruments, including time deposits, bank repurchase agreements and commercial
paper, with an original maturity of three months or less, to be cash
equivalents.
Inventories are stated at the lower of cost or market value. Cost includes
materials, transportation, direct labor and manufacturing overhead. Cost is
determined by the last-in, first-out (LIFO) method of inventory valuation.
Property is stated at cost, including interest expense capitalized during
construction periods. Maintenance and repairs are charged to expense as
incurred. The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable.
Depreciation is computed using the straight-line method over estimated
useful lives ranging from 10 to 45 years for buildings and improvements and 3 to
20 years for machinery and equipment.
F-7
<PAGE> 80
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Financing Costs -- Costs incurred in connection with the issuance
of long-term debt or other financing arrangements are capitalized. Amortization
of deferred financing costs is computed using the straight-line method over the
term of the related debt and is reported as interest expense.
Start-Up Costs incurred in bringing major new or expanded facilities into
operation are capitalized and charged to expense over periods of not more than
five years.
Investment in Affiliates -- The equity method of accounting is applied to
affiliates in which the Company's ownership interest is greater than 20 percent
but less than or equal to 50 percent. Goodwill is recognized for investments in
affiliates where cost exceeds the equity in net assets acquired. In general,
goodwill is amortized over the average remaining useful life of the
unconsolidated affiliate's property, plant and equipment or such shorter period
as circumstances indicate. The Company's proportionate share of earnings in
unconsolidated affiliates accounted for by the equity method, net of
amortization of goodwill, is included in "Other income (expense) -- net" on the
Company's income statement. The cost method of accounting is applied to
affiliates in which the Company's ownership interest is less than or equal to 20
percent.
Income Taxes -- Deferred income taxes are provided using the liability
method for those items for which the period of reporting differs for financial
reporting and income tax purposes in accordance with Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (FAS No. 109), which was adopted
effective October 1, 1992 (see Note 8).
Business Segment -- The Company manufactures paper packaging products
including corrugated containers, corrugated sheets, preprinted linerboard,
containerboard, unbleached kraft paper and multiwall bags.
Net Income Per Common and Common Equivalent Share is based on the weighted
average number of common shares outstanding during the period plus the weighted
average number of common shares issuable upon exercise of outstanding stock
options (see Note 13) for which the market price of the related stock exceeds
the exercise price of the option, less shares which could have been purchased
with the assumed proceeds from the sale of such stock (treasury stock method).
Pending Accounting Standard -- The Company will adopt the financial
disclosure provisions of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation" (FAS No. 123) in fiscal 1997. Adoption of the
financial disclosure provisions of FAS No. 123 will not affect the Company's
financial position, results of operations or cash flows.
2. NON-RECURRING OPERATING CHARGES
In the fourth quarter of Fiscal 1996, the Company recorded an $8.1 million
pre-tax charge for costs associated with a staff reduction program. The staff
reduction program, which eliminated approximately 8 percent of the Company's
salaried positions, will reduce future administrative and overhead costs. In
Fiscal 1995, the Company recorded a $5.4 million non-recurring charge for costs
associated with an early retirement option accepted by certain hourly employees
at the Antioch, California mill, which will reduce future unit labor costs. In
Fiscal 1994, the Company recorded non-recurring operating charges of $15.5
million for asset write-downs and other costs associated with the relocation,
closure or sale of certain converting facilities.
3. EXTRAORDINARY ITEM
During Fiscal 1996, the Company repurchased and retired approximately $75.2
million principal amount of its publicly traded debt securities. In conjunction
with the repurchases, approximately $1.5 million of deferred financing fees were
written off. These transactions resulted in an extraordinary loss of $3.2
million, net of an income tax benefit of $2.3 million.
F-8
<PAGE> 81
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN AFFILIATES
On July 12, 1996, the Company contributed grocery bag manufacturing net
assets with a carrying value of $32.3 million (of which Property -- net
accounted for $25.1 million), to S&G Packaging Company, L.L.C. (S&G Packaging),
a joint venture with Stone Container Corporation, in exchange for a 35 percent
equity interest in the new company. The Company has the option to purchase an
additional 15 percent interest within the next five years. Beginning July 13,
1996, the financial results of S&G Packaging were reported on the equity method
of accounting. Product sales to S&G Packaging during Fiscal 1996 were
approximately $6.8 million.
The Company owns a 50 percent interest in Gaylord Central National, Inc.
(GCN), a joint venture corporation formed with Central National-Gottesman, Inc.
GCN is the primary agent for the Company's export sales of containerboard.
Product sales to GCN during Fiscal 1996, Fiscal 1995 and Fiscal 1994 were
approximately $38.2 million, $62.0 million and $16.6 million, respectively.
The Company owns a 50 percent ownership interest in a corporation that
produces corrugated containers in Mexico. Product sales to this company during
Fiscal 1996 and Fiscal 1995 were approximately $6.4 million and $4.1 million,
respectively.
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Finished products........................................... $16.3 $ 17.4
In process.................................................. 31.3 34.8
Raw materials............................................... 8.5 15.1
Supplies.................................................... 14.3 15.8
----- ------
70.4 83.1
LIFO valuation adjustment................................... -- (10.0)
----- ------
Total.................................................. $70.4 $ 73.1
===== ======
</TABLE>
In Fiscal 1996, the Company's total inventory quantities decreased. At the
same time, inventory costs declined substantially, principally due to lower raw
material costs. As a result of the combination of quantity and cost decreases,
the LIFO valuation adjustment was reduced to zero. Approximately $1.4 million of
the change was due to the decrease in quantities, which caused "Cost of goods
sold" to be less than it would have been if such decrease had not occurred.
As a result of a LIFO inventory liquidation in Fiscal 1994, the Company's
"Cost of goods sold" in Fiscal 1994 was approximately $0.2 million less than it
would have been had a liquidation not occurred.
F-9
<PAGE> 82
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY -- NET
Property consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Land...................................................... $ 15.5 $ 15.4
Buildings and improvements................................ 127.4 121.5
Machinery and equipment................................... 848.5 841.8
Construction-in-progress.................................. 41.9 35.2
-------- --------
1,033.3 1,013.9
Accumulated depreciation.................................. (421.0) (373.9)
-------- --------
Total................................................ $ 612.3 $ 640.0
======== ========
</TABLE>
7. DEFERRED CHARGES
Deferred charges consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Deferred financing costs................................... $ 40.1 $ 39.9
Capitalized start-up costs................................. -- 5.0
Intangibles................................................ 4.2 4.7
------ ------
44.3 49.6
Accumulated amortization................................... (25.7) (25.6)
------ ------
Total................................................. $ 18.6 $ 24.0
====== ======
</TABLE>
Amortization of deferred charges during Fiscal 1996, Fiscal 1995 and Fiscal
1994 was approximately $4.3 million, $7.4 million and $6.3 million,
respectively. During Fiscal 1996, the Company wrote off approximately $1.5
million of deferred financing fees related to the repurchase and retirement of
its publicly traded debt securities (see Note 3).
F-10
<PAGE> 83
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The components of the deferred income tax liabilities and assets, current
and non-current, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Current
Deferred tax assets:
Net operating loss....................................... $ -- $ 42.8
Inventory valuation...................................... 5.1 6.8
------ ------
Deferred tax asset......................................... $ 5.1 $ 49.6
====== ======
Non-Current
Deferred tax assets:
Net operating loss....................................... $ 83.7 $ 93.6
Original issue discount.................................. 59.2 --
Asset write-down......................................... 41.0 49.0
Debt restructuring expenses.............................. 2.4 3.3
Other long-term liabilities.............................. 5.6 2.4
Deferred compensation.................................... 5.5 8.4
Other.................................................... 11.8 8.1
------ ------
Sub-total............................................. 209.2 164.8
------ ------
Deferred tax liabilities:
Depreciation............................................. 178.6 177.2
Capitalized interest..................................... 12.2 11.9
Other.................................................... 1.6 1.6
------ ------
Sub-total............................................. 192.4 190.7
------ ------
Net non-current deferred tax asset (liability)............. $ 16.8 $(25.9)
====== ======
</TABLE>
The current income tax provision for Fiscal 1996 and Fiscal 1995,
principally for state income taxes and Alternative Minimum Tax (AMT), was $4.2
million and $3.8 million, respectively. The deferred income tax provision for
Fiscal 1996 was $1.8 million, net of the deferred tax benefit related to the
extraordinary loss (see Note 3), and the deferred tax benefit for Fiscal 1995
was $28.0 million. Deferred income taxes result from temporary differences in
the period of reporting revenues, expenses and credits in the financial
statements and
F-11
<PAGE> 84
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income tax return. Such temporary differences for Fiscal 1996, Fiscal 1995 and
Fiscal 1994 and their related deferred income tax provision (benefit) follow:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Depreciation expense.................................. $ 1.4 $ 5.8 $ 7.3
Original issue discount............................... (18.1) -- --
Asset write-down...................................... 8.0 (0.6) (2.1)
Restructuring fees.................................... 0.9 0.9 (0.2)
Inventory differences................................. 1.7 (0.8) (2.7)
Net operating loss.................................... 11.6 45.6 (33.0)
Change in valuation allowance......................... -- (75.3) 32.9
Other -- net.......................................... (3.7) (3.6) (2.2)
------ ------ ------
Total deferred income tax provision (benefit)....... $ 1.8 $(28.0) $ --
====== ====== ======
</TABLE>
Income tax benefits that would have been recognized in Fiscal 1994 were
offset by a change in the valuation allowance. This was due to substantial
uncertainty regarding realization of such benefits as a result of the Company's
substantial net operating loss carryforwards. In Fiscal 1995, the future
realization of tax benefits relating to prior net operating losses became more
likely than not due to the Company's improved operating performance and future
economic outlook. Thus in Fiscal 1995, the Company reduced the valuation
allowance to zero.
In Fiscal 1996, the Company reclassified approximately $41 million of its
"Net operating loss" deferred tax asset to "Original issue discount." The
"Original issue discount" is not deductible on the Company's income tax return
until the related debt issue is repaid.
Although realization is not assured, management believes it is more likely
than not that all of the Company's deferred tax assets will be realized.
Management believes anticipated future taxable income, including but not limited
to the reversal of existing temporary differences and implementation of tax
planning strategies, if needed, will be sufficient to allow the future
realization of its deferred tax assets at September 30, 1996.
At September 30, 1996, the Company had cumulative regular net operating
loss carryforwards of approximately $211 million, which may be carried forward
and expire at various dates through the year 2010. At September 30, 1996, AMT
credits of approximately $7 million for tax purposes may be carried forward
indefinitely to be applied against regular tax.
F-12
<PAGE> 85
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax provision (benefit) to the amount computed
by applying the statutory Federal income tax rates to the income (loss) before
taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
INCOME INCOME LOSS
BEFORE BEFORE BEFORE
AMOUNT INCOME TAXES AMOUNT INCOME TAXES AMOUNT INCOME TAXES
------ ------------- ------ ------------- ------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax..... $ 7.0 35% $ 38.5 35% $(29.4) (35)%
State income taxes -- net of
Federal benefit................ 1.4 7 6.6 6 (4.2) (5)
Limitation on use of net
operating losses............... -- -- -- -- 33.6 40
Reduction in valuation
allowance...................... -- -- (75.3) (68) -- --
Other............................ (0.1) -- 6.0 5 -- --
----- -- ------ --- ------ ---
Total income tax provision
(benefit)................. $ 8.3 42% $(24.2) (22)% $ -- --%
===== == ====== === ====== ===
</TABLE>
9. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Revolving Credit Facility (a)............................... $ -- $ --
Trade Receivables Facility (b).............................. -- --
Senior Notes, 11.5%, due May 2001 (d)....................... 179.7 225.0
Pollution control and industrial revenue bonds, interest at
5.7% to 8.3%, due at various dates to 2008 (e)............ 11.6 12.2
Capital lease obligations, interest at 7.6% to 11.8%, due at
various dates to 2002 (c)................................. 16.2 19.0
Other senior debt, interest at 6.5% to 8.75%, due at various
dates to 1999............................................. 22.6 29.3
------ ------
Total senior debt.................................... 230.1 285.5
Senior Subordinated Discount Debentures, 12.75%, due May
2005 (net of unamortized discount of $32.6 million in
Fiscal 1995) (f).......................................... 404.3 401.6
------ ------
Total debt........................................... 634.4 687.1
Less current maturities..................................... (11.3) (15.6)
------ ------
Total................................................ $623.1 $671.5
====== ======
</TABLE>
Scheduled aggregate annual principal payments due on long-term debt during
each of the next five years are (in millions) $11.3, $14.2, $8.6, $5.7 and
$183.6, respectively.
(a) In Fiscal 1996, the Company amended its bank credit agreement (as
amended, the Bank Credit Agreement) to (i) allow the S&G Packaging joint
venture, (ii) allow the Company to repurchase its common stock and (iii) modify
certain financial covenants allowing the Company greater financial flexibility.
In Fiscal 1995, the Company amended and restated its prior bank credit
agreement. Among other changes, the amendment increased the revolving credit
facility from $66 million to $175 million, extended the maturity date of the
revolving credit facility from September 1997 to June 2000, allowed the purchase
or
F-13
<PAGE> 86
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redemption of up to $100 million of public debt securities, increased the level
of permitted capital expenditures by approximately $25 million per year for the
next two years, allowed 100 percent carry-over of unexpended capital expenditure
amounts and reduced the interest rate charged on outstanding borrowings by 0.5
percent. At September 30, 1996, the Bank Credit Agreement was comprised of the
$175 million revolving credit facility due in June 2000 (the Revolving Credit
Facility), and a $7.3 million standby letter of credit facility with a final
maturity in April 1999 (the L/C Facility).
The Company is required to maintain and is in compliance with certain
financial covenants including tests for current ratio, minimum net worth and
minimum interest coverage ratio. The level of the Company's annual capital
expenditures is also limited by the Bank Credit Agreement. All obligations under
the Bank Credit Agreement are secured by liens on substantially all of the
Company's assets. In connection with a trade receivables-backed revolving credit
facility, the Company sells on an ongoing basis substantially all of its
accounts receivable to a wholly owned, special purpose subsidiary, and such
accounts receivable are not subject to a lien under the Bank Credit Agreement.
See (b) below.
The Revolving Credit Facility provides the ability to borrow funds and to
repay such funds in whole or in part from time to time without incurring any
prepayment penalty. Up to $25 million of standby letters of credit, which reduce
the facility by a like amount, may be issued under this agreement. At September
30, 1996, no amounts were outstanding under the Revolving Credit Facility,
$169.2 million of credit was available and $5.8 million of standby letters of
credit were outstanding. The highest outstanding principal balance under the
facility during Fiscal 1996 was $2.5 million, and the weighted average interest
rate was 10.2 percent. A commitment fee of 0.375 percent per year is paid on the
unused portion of the facility.
The L/C Facility provides for standby letter of credit loans which are
incurred only in the event that the standby letters of credit are drawn due to
nonpayment of principal or interest on certain debt instruments, which are
secured by these standby letters of credit. The standby letter of credit
commitment is permanently reduced periodically to reflect principal repayments.
The Company has the right to prepay the standby letter of credit loans in whole
or in part from time to time without incurring any prepayment penalty. At
September 30, 1996, the aggregate standby letter of credit commitment was
approximately $7.3 million. A fee of 2.75 percent per annum is payable on
outstanding letters of credit under both the Revolving Credit Facility and the
L/C Facility.
The Company has various interest rate options for Bank Credit Agreement
borrowings based on one or a combination of the following three rates: (i) prime
rate loans at the prime rate in effect from time to time plus a borrowing margin
of 1.5 percent per annum, (ii) certificate of deposit (CD) rate loans at the
relevant CD rate plus a borrowing margin of 2.625 percent per annum, or (iii)
Eurodollar rate loans at the relevant Eurodollar rate plus a borrowing margin of
2.5 percent per annum. The Company has the option of incurring Eurodollar and CD
rate loans for 30, 60, 90, 120 or 180-day periods. Interest is payable monthly.
(b) In September 1993, the Company established a wholly owned, special
purpose subsidiary, Gaylord Receivables Corporation (GRC). Concurrently, GRC and
a group of banks established a $70 million trade receivables-backed revolving
credit facility (the Trade Receivable Facility) due in September, 1999. In
accordance with the provisions of this program, GRC purchases (on an on-going
basis) substantially all of the accounts receivable of the Company. GRC
transfers the accounts receivable to a trust in exchange for certain trust
certificates representing ownership interests in the accounts receivable. The
trust certificates received by GRC from the trust are solely the assets of GRC.
In the event of liquidation of GRC, the creditors of GRC would be entitled to
satisfy their claims from GRC's assets prior to any distribution to the Company.
GRC has various interest rate options for Trade Receivable Facility
borrowings based on one or a combination of the following two rates: (i) prime
rate loans at the higher of (a) the prime rate in effect from time to time or
(b) the Federal Funds Rate plus 0.5 percent per annum, or (ii) LIBOR rate loans
at the relevant LIBOR rate plus a borrowing margin of 0.75 percent per annum.
Interest is payable monthly. GRC is
F-14
<PAGE> 87
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligated to pay a commitment fee of 0.5 percent per annum on the unused credit
available under the Trade Receivable Facility. Credit availability under the
Trade Receivable Facility is based on a borrowing base formula (as defined). As
a result, the full amount of the facility may not be available at all times. At
September 30, 1996, no amounts were outstanding under the Trade Receivable
Facility and $60.3 million of credit was available to GRC pursuant to the
borrowing base formula. The highest outstanding principal balance under the
Trade Receivable Facility during Fiscal 1996 was $30.0 million and the weighted
average interest rate was 8.2 percent. At September 30, 1996 and 1995, the
Company's consolidated balance sheet included $91.8 million and $118.8 million,
respectively, of accounts receivable sold to GRC.
(c) In Fiscal 1996 and Fiscal 1995, in conjunction with the $250 million
capital expenditure program, the Company entered into various capital leases
with an aggregate value of approximately $1.1 million and $29.4 million,
respectively, to finance equipment at its converting facilities. The capital
leases have terms ranging from five to seven years. The capital leases contain
certain covenants which are standard for these types of obligations, but do not
contain any operating or financial covenants.
(d) In May 1993, the Company issued $225 million aggregate principal amount
of 11-1/2% Senior Notes Due 2001 (the Senior Notes). The Senior Notes are
general unsecured obligations of the Company and rank senior in right of payment
to the Subordinated Discount Debentures (as defined in (f) below) and all other
existing and future subordinated indebtedness of the Company. The Senior Notes
rank pari passu with all senior debt of the Company, including indebtedness
under the Bank Credit Agreement. Indebtedness under the Bank Credit Agreement,
however, is secured by liens on substantially all of the assets of the Company.
Interest on the Senior Notes is payable semiannually on May 15 and November 15.
The Senior Notes will mature on May 15, 2001 and are subject to redemption on or
after May 15, 1997 at the option of the Company, in whole or in part, at
declining redemption prices commencing at 104.93 percent of the principal amount
and declining to 100 percent of the principal amount at May 15, 2000 and
thereafter, plus accrued interest to the date of redemption. During Fiscal 1996,
the Company repurchased and retired $45.3 million principal amount of the Senior
Notes (see Note 3).
Upon the occurrence of a change of control (as defined), each holder of the
Senior Notes has the right to require the Company to repurchase such holder's
Senior Notes at a price equal to 101 percent of the principal amount thereof,
plus accrued interest to the date of repurchase. In addition, the Company will
be required to make an offer to repurchase the Senior Notes at 100 percent of
the principal amount, plus accrued interest to the date of repurchase, in the
event of certain asset sales.
(e) The pollution control and industrial revenue bonds were assumed by the
Company from Crown Zellerbach Corporation (Crown Zellerbach). The Company also
acquired a note receivable from Crown Zellerbach for an amount and with terms
identical to those of the bonds. At September 30, 1996 and 1995, such note
receivable was approximately $11.6 million and approximately $12.2 million,
respectively, and was classified as "Other assets."
(f) In May 1993, the Company issued approximately $434.2 million aggregate
principal amount (approximately $300 million of gross proceeds) of 12-3/4%
Senior Subordinated Discount Debentures Due 2005 (the Subordinated Discount
Debentures). The Subordinated Discount Debentures are general unsecured
obligations of the Company and are subordinated in right of payment to all
senior debt of the Company. The Subordinated Discount Debentures were issued at
approximately 69 percent of their principal amount. Commencing May 15, 1996,
interest will accrue until maturity on the Subordinated Discount Debentures at
the rate of 12.75 percent per annum. Interest on the Subordinated Discount
Debentures is payable semiannually on May 15 and November 15, commencing
November 15, 1996. The Subordinated Discount Debentures will mature on May 15,
2005 and are subject to redemption on or after May 15, 1998 at the option of the
Company, in whole or in part, at declining redemption prices commencing at
106.38 percent of the principal amount and declining to 100 percent of the
principal amount at May 15, 2003 and thereafter, plus accrued interest to the
date of redemption. During Fiscal 1996, the Company repurchased on the open
F-15
<PAGE> 88
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market and retired approximately $29.9 million principal amount of the
Subordinated Discount Debentures (see Note 3).
Upon the occurrence of a change of control (as defined), each holder of the
Subordinated Discount Debentures has the right to require the Company to
repurchase such holder's Subordinated Discount Debentures at a price equal to
101 percent of the principal amount thereof, plus accrued interest to the date
of repurchase. In addition, the Company will be required to make an offer to
repurchase the Subordinated Discount Debentures at 100 percent of the principal
amount, or accreted value thereof, plus accrued interest to the date of
repurchase, in the event of certain asset sales.
The Company has various restrictions under (a), (d) and (f) which limit,
among other things, its ability to (i) incur additional obligations for money
borrowed, (ii) incur certain liens on the Company's assets, (iii) make capital
expenditures, (iv) incur guarantees, (v) acquire the assets or capital stock of
other businesses, (vi) dispose of any material assets constituting collateral,
(vii) make any voluntary prepayments of any indebtedness for money borrowed,
(viii) pay, declare, or distribute dividends on or repurchase its capital stock
or warrants and (ix) enter into certain transactions with affiliates.
10. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Current
Accrued salaries and wages.................................. $27.0 $ 39.6
Other....................................................... 39.9 33.3
----- ------
Total current............................................. 66.9 72.9
----- ------
Long-term
Accrued acquisition restructuring costs..................... 1.3 2.0
Accrued pension expense..................................... 17.3 13.1
Casualty insurance liabilities.............................. 3.4 5.5
Other....................................................... 7.1 6.9
----- ------
Total long-term........................................... 29.1 27.5
----- ------
Total..................................................... $96.0 $100.4
===== ======
</TABLE>
11. PREFERRED STOCK
The Company is authorized to issue up to 25,000,000 shares of preferred
stock. The right of the holders of Class A Common Stock (see Note 12) voting as
a class are not to be limited by the grant of voting rights to any series of
preferred stock. The Company's Certificate of Incorporation prohibits the
issuance of non-voting preferred stock.
12. COMMON STOCK
At September 30, 1996 and 1995, the Company had authorized capital stock of
125,000,000 shares of Class A Common Stock, par value $.0001 per share (Class A
Common Stock), of which 54,270,011 shares and 54,124,530 shares were issued,
respectively, and 52,688,233 shares and 54,077,527 shares were outstanding,
respectively.
F-16
<PAGE> 89
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1996 and 1995, the Company had authorized capital stock of
15,000,000 shares of Class B Common Stock, par value $.0001 per share (Class B
Common Stock and together with the Class A Common Stock, the Common Stock), of
which no shares were issued and outstanding. On July 31, 1995, all of the
Company's 5,250,082 then outstanding shares of Class B Common Stock
automatically converted into an equal number of shares of Class A Common Stock.
The Company has outstanding Warrants to obtain one share of Class A Common
Stock per Warrant. At the time the Company issued the Warrants it also issued an
equal number of shares of Class A Common Stock to the Warrant Trustee for
issuance upon exercise of the Warrants (the Trust Stock). The Warrants are
exercisable only for the shares of Trust Stock held by the Warrant Trustee and
the Company has no obligation to issue or deliver shares of stock pursuant to
the Warrants. The Warrant Trustee has agreed to hold the Trust Stock in trust
and to deliver shares of Trust Stock upon exercise of the Warrants by the
holders thereof or exchange of the Warrants on behalf of the Company. The
Warrant Trustee will vote all shares of Trust Stock in proportion to all other
votes by holders of the Common Stock, except upon the occurrence of certain
votes (as defined).
In June 1995, the Company redeemed 25 percent of its 31,845,533 outstanding
Warrants, and subsequently, a portion of the remaining Warrants were exchanged
pursuant to a "Special Exercise on July 31, 1995." As a result, a total of
13,836,754 Warrants were exchanged for Class A Common Stock in Fiscal 1995.
The remaining 18,008,701 Warrants became exercisable on July 31, 1996 and
expire on November 2, 2002. Each Warrant is exercisable into one share of Class
A Common Stock at an exercise price of $.0001 per Warrant, which amount was paid
with a portion of the consideration received from exchanging noteholders and is
non-refundable. The Company will have the option to redeem any or all of the
unexercised Warrants for one share of Class A Common Stock or for cash at any
time at $16.65 per share.
In June 1995, the Board of Directors adopted a stockholders Rights
Agreement that provides for the distribution of one Preferred Share Purchase
Right on each share of Class A Common Stock. Generally, the rights become
exercisable after a person or group announces a tender offer for, or acquires,
15 percent or more of the outstanding Class A Common Stock. In that event, each
right becomes exercisable to purchase one one-hundredth of a share of junior
participating preferred stock for $50. If 15 percent of the outstanding Class A
Common Stock is acquired, each right (other than the rights held by the
acquiring person) becomes exercisable to purchase, for $50, shares of Class A
Common Stock with a market value of $100. The rights will expire on June 30,
2005 and may be redeemed by the Company for $0.0001 per right at any time prior
to the date on which 15 percent or more of the Class A Common Stock is acquired.
In the third quarter of Fiscal 1996, the Board authorized the repurchase of
up to 6,000,000 shares of Class A Common Stock and canceled a February 1989
authorization for the repurchase of up to 500,000 shares of Class A Common
Stock. During Fiscal 1996, the Company repurchased 1,570,500 shares of Class A
Common Stock and may repurchase additional shares from time to time on the open
market. Shares repurchased under the program are held as treasury stock. At
September 30, 1996 and 1995, 1,581,778 shares and 47,003 shares, respectively,
of Class A Common Stock were held as treasury stock.
In July 1994, the Company established a stock purchase plan (the Plan) for
all full-time employees. The Plan permits employees to invest up to 10 percent
of their after-tax compensation (as defined) for the purchase of shares of Class
A Common Stock. All brokerage fees for the purchase of such shares are paid by
the Company. During Fiscal 1996, Fiscal 1995 and Fiscal 1994 the Company issued
35,725 shares, 35,975 shares and 2,722 shares, respectively, of Class A Common
Stock held as treasury stock to satisfy employee purchases pursuant to the Plan.
The Company neither declared nor paid dividends on its Common Stock during
Fiscal 1996, Fiscal 1995 or Fiscal 1994. The Company does not currently intend
to pay cash dividends on its Common Stock, but intends instead to retain future
earnings for reinvestment in the business and for repayment of debt. At
F-17
<PAGE> 90
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1996, the Company was prohibited from declaring or paying cash
dividends on its Common Stock, except under certain limited circumstances (see
Note 9).
13. STOCK OPTION PLANS
The Company maintains three stock-based plans pursuant to which stock
options may be granted at no less than the market price of the Class A Common
Stock on the date of grant: (i) the 1989 Long-Term Incentive Plan (the 1989
Plan), (ii) the 1987 Key Employee Stock Option Plan (the 1987 Plan) and (iii)
the Outside Director Stock Option Plan (the Director Option Plan) which was
terminated in September 1991.
1989 Plan -- The 1989 Plan authorizes the Company to grant options
(including both incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the Code), and nonqualified stock
options), stock appreciation rights, stock indemnification rights, restricted
stock and performance awards to officers and key employees. The Company has
granted only nonqualified stock options and restricted stock under the 1989
Plan. At September 30, 1996, the Company was authorized to issue 2,279,833
shares of Class A Common Stock, and had outstanding nonqualified stock options
covering 1,115,713 shares of Class A Common Stock at exercise prices from $2.56
per share to $11.63 per share. During Fiscal 1996, the Company granted
nonqualified stock options under the 1989 Plan covering 25,000 shares of Class A
Common Stock (none of which have been forfeited) at exercise prices ranging from
$7.31 per share to $9.00 per share. In general, the options have 10-year terms
and vest at the rate of 33 1/3 percent per year commencing approximately one
year after the date of grant so long as the optionee remains continuously in the
employ of the Company or one of its subsidiaries; provided, however, that 100
percent of such options will vest immediately upon a change in control of the
Company (as defined) or the optionee's death or disability.
At September 30, 1996, options to purchase 839,559 shares of Class A Common
Stock at exercise prices ranging from $2.56 per share to $10.88 per share were
exercisable, 282,078 options had been exercised and 371,217 shares were
available for future grants under the 1989 Plan.
At September 30, 1996, the Company had granted 510,825 restricted shares of
Class A Common Stock under the 1989 Plan. Such shares are restricted in that
unvested shares will be forfeited in the event that the optionee's employment
terminates other than due to death, disability or retirement. The restricted
shares will vest 100 percent in the event of a change in control of the Company
(as defined) or upon the recipient's retirement, death or disability. During
Fiscal 1996, the Company awarded 42,100 restricted shares of Class A Common
Stock (200 of which have been forfeited). As to the restricted shares granted
during Fiscal 1996, 100 shares, 11,800 shares, 20,000 shares, and 10,000 shares
will become 100 percent vested in fiscal 1997, fiscal 1998, fiscal 1999, and
fiscal 2001 respectively. As to 468,925 restricted shares granted prior to
Fiscal 1996, 414,525 shares were 100 percent vested at September 30, 1996 and
35,900 shares, 14,500 shares and 4,000 shares will become 100 percent vested in
fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
1987 Plan -- The 1989 Plan superseded the 1987 Plan under which no
additional options may be granted except for shares of Class A Common Stock
which become available after September 30, 1988 due to expiration, termination
without exercise, unexercisability or forfeiture of any option granted under the
1987 Plan. The Company has reserved 854,467 shares of Class A Common Stock in
connection with grants under the 1987 Plan. At September 30, 1996, the Company
had outstanding nonqualified stock options under the 1987 Plan covering 534,040
shares of Class A Common Stock at exercise prices ranging from $1.24 per share
to $8.38 per share. During Fiscal 1996, the Company granted nonqualified stock
options under the 1987 Plan covering 20,000 shares of Class A Common Stock (none
of which have been forfeited) at an exercise price of $7.88 per share. The
options have 10-year terms and vest at the rate of 33 1/3 percent per year
commencing approximately one year after the date of grant so long as the
optionee remains continuously in the employ of the Company or one of its
subsidiaries; provided, however, that 100 percent of such options will vest
immediately upon a change in control of the Company (as defined) or the
optionee's death or disability.
F-18
<PAGE> 91
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1996, options to purchase 503,006 shares of Class A Common
Stock at exercise prices ranging from $1.24 to $5.38 per share were exercisable
and 15,668 and 15,366 will become exercisable in fiscal 1997 and fiscal 1998,
respectively. At September 30, 1996, options for 306,415 shares had been
exercised and 14,012 shares were available for future grants.
Director Option Plan -- The Director Option Plan authorized grants of stock
options to each director who was not an employee of the Company (the Outside
Directors) in lieu of all or some specified portion of certain cash fees. The
Director Option Plan was terminated on September 26, 1991.
The Company has reserved 115,700 shares of Class A Common Stock in
connection with grants under the Director Option Plan. In the aggregate, the
Company granted options on 121,000 shares (5,300 of which have been forfeited)
of Class A Common Stock at exercise prices of $3.50 and $12.50 per share in lieu
of $220,000 of cash fees payable with respect to fiscal 1991 and fiscal 1990.
At September 30, 1996, options to purchase 59,000 shares of Class A Common
Stock at exercise prices of $3.50 and $12.50 per share were exercisable and
options for 56,700 shares had been exercised under the Director Option Plan.
The following table details stock option activity (excluding restricted
stock) for Fiscal 1996, Fiscal 1995 and Fiscal 1994:
<TABLE>
<CAPTION>
STOCK OPTIONS EXERCISE PRICE
------------- --------------
<S> <C> <C>
Balance at September 30, 1993...................... 1,752,423 $1.24 - $12.50
Grants during Fiscal 1994........................ 357,000 $3.75 - $ 6.25
Exercises........................................ (124,416) $1.24 - $ 3.75
Cancellations.................................... (91,904) $1.24 - $ 3.75
---------
Balance at September 30, 1994...................... 1,893,103 $1.24 - $12.50
Grants during Fiscal 1995........................ 294,000 $8.00 - $11.63
Exercises........................................ (306,648) $1.24 - $ 4.25
Cancellations.................................... (40,785) $1.24 - $ 8.63
---------
Balance at September 30, 1995...................... 1,839,670 $1.24 - $12.50
Grants during Fiscal 1996........................ 45,000 $7.31 - $ 9.00
Exercises........................................ (122,981) $1.24 - $ 8.63
Cancellations.................................... (52,936) $2.56 - $10.88
---------
Balance at September 30, 1996...................... 1,708,753 $1.24 - $12.50
=========
</TABLE>
The following table details restricted stock activity for Fiscal 1996,
Fiscal 1995 and Fiscal 1994:
<TABLE>
<CAPTION>
RESTRICTED STOCK
----------------
<S> <C>
Balance at September 30, 1993............................... 247,025
Issued during Fiscal 1994................................. 213,600
Cancellations............................................. (23,100)
-------
Balance at September 30, 1994............................... 437,525
Issued during Fiscal 1995................................. 47,800
Cancellations............................................. (7,050)
-------
Balance at September 30, 1995............................... 478,275
Issued during Fiscal 1996................................. 42,100
Cancellations............................................. (9,550)
-------
Balance at September 30, 1996............................... 510,825
=======
</TABLE>
F-19
<PAGE> 92
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. LEASES
The Company has capital leases for certain equipment and leasehold
improvements included in "Property -- net." The present value of future minimum
lease payments relating to these leased assets are capitalized based on the
lease contract provisions. Capitalized amounts are amortized over either the
lives of the leases or the normal depreciable lives of the assets. All other
leases are defined as operating leases. Lease expenses related to operating
leases are charged to expense as incurred.
Future minimum lease payments at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
----------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
1997...................................................... $ 8.8 $ 5.7
1998...................................................... 6.8 4.8
1999...................................................... 5.2 4.6
2000...................................................... 4.3 3.2
2001...................................................... 3.9 1.2
2002 and thereafter....................................... 19.8 --
----- -----
Total future minimum lease payments..................... $48.8 19.5
=====
Less interest........................................ 3.3
-----
Present value of future minimum lease payments.......... $16.2
=====
</TABLE>
Rent expense for Fiscal 1996, Fiscal 1995 and Fiscal 1994 was $11.4
million, $11.7 million and $10.8 million, respectively.
15. EMPLOYEE BENEFIT PLANS
Pension Plan -- The Company has a noncontributory defined benefit pension
plan covering substantially all employees who are age 21 or older and have one
or more years of service. Pension benefits provided for certain union hourly
employees are established pursuant to the collective bargaining agreements in
effect with their respective unions. For hourly employees the normal retirement
benefit is determined by multiplying years of benefit service by a dollar amount
benefit factor separately determined for each bargaining unit. For salaried
employees, the plan generally provides a normal retirement benefit equal to the
greater of the benefit accrued at June 30, 1987 or 1.0 percent of final average
earnings (as defined) multiplied by years of credited service before January 1,
1994 plus 1.25 percent of final average earnings multiplied by years of credited
service after January 1, 1994 less 1.0 percent of primary Social Security
benefits for each year of credited service. The Company has an excess benefit
plan covering officers of the Company whose earned pension benefits would
otherwise be restricted by maximum benefit limitations imposed by Internal
Revenue Service regulations.
In Fiscal 1995, the Company recorded a $5.4 million charge for costs
associated with an early retirement option accepted by certain hourly employees
of the Antioch mill, to reduce future unit labor costs.
In Fiscal 1996, the Company recorded a $5.2 million charge for pension
costs associated with the staff reduction program which will reduce future
administrative and overhead costs (see Note 2).
F-20
<PAGE> 93
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net periodic pension cost follow:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost........................................... $ 4.5 $ 3.6 $ 4.1
Interest cost.......................................... 9.8 8.5 7.8
Return on plan assets.................................. (19.7) (17.9) (2.7)
Net amortization and deferral.......................... 10.5 9.7 (5.3)
Staff reduction program................................ 5.2 -- --
Antioch mill early retirement.......................... -- 5.4 --
------ ------ -----
Net pension cost.................................. $ 10.3 $ 9.3 $ 3.9
====== ====== =====
</TABLE>
Assumptions used to develop the net periodic pension costs were:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 7.5% 8.0% 7.0%
Expected rate of return on plan assets...................... 9.0% 9.0% 9.0%
Expected rate of salary increases........................... 5.0% 5.0% 5.0%
</TABLE>
The discount rate used to determine the accrued pension liability at
September 30, 1996, 1995 and 1994 was 7.5 percent, 7.5 percent and 8.0 percent,
respectively.
The status of the pension plan follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested.................................................. $ 121.3 $ 112.4
Nonvested............................................... 8.9 9.7
------- -------
Accumulated benefit obligation.......................... 130.2 122.1
Effect of salary progression............................ 9.8 8.7
------- -------
Projected benefit obligation............................ 140.0 130.8
Plan assets at market value (primarily government
securities, corporate bonds and common stocks).......... (126.7) (108.2)
------- -------
Plan assets less than projected benefit obligation........ 13.3 22.6
Unrecognized net gain (loss).............................. 2.1 (11.1)
Prior service benefit not yet recognized in net periodic
pension cost............................................ (2.6) (2.6)
Adjustment required to recognize minimum pension
liability............................................... -- 4.9
------- -------
Accrued pension liability.......................... $ 12.8 $ 13.8
======= =======
</TABLE>
The Company's funding policy is to contribute annually amounts necessary to
satisfy the statutory requirements of ERISA.
Supplemental Executive Retirement Plans -- Under the terms of their
employment agreements, Marvin A. Pomerantz (Chairman, Chief Executive Officer
and a Director of the Company) and Warren J. Hayford (Former Vice Chairman and a
Director of the Company) will receive supplemental annual retirement income
payments at age 65 equal to approximately 50 percent of their average base
salary and
F-21
<PAGE> 94
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bonus for their four most highly compensated years of service with the Company,
less primary Social Security benefits and any amounts received under the
Company's pension plan. The agreements also provide for the reduction of
benefits for early retirement. Mr. Hayford elected early retirement on December
31, 1992 and is receiving benefits under the supplemental retirement plan. An
additional supplemental retirement plan covering seven officers provides annual
retirement payments at age 65 equal to 60 percent of their average base salary
and bonus for the four highest of the last seven years prior to retirement, less
primary Social Security and any amounts received under the Company's pension
plan. Benefits are reduced for early retirement.
At September 30, 1996 and 1995, the actuarial present value of projected
benefit obligations for the supplemental retirement income payments described
above was approximately $10.2 million and $8.0 million, respectively. At
September 30, 1996, the actuarial present value of accumulated benefit
obligations exceeded the accrual for the vested portion of the obligations and
the Company recognized a minimum pension liability adjustment of $2.8 million
and a corresponding reduction to stockholders' equity of $1.2 million. Funding
for the supplemental retirement income payments is not subject to the statutory
requirements of ERISA and no assets have been set aside to satisfy the
liability. Required supplemental annual retirement income payments will be made
from general corporate funds.
The components of net periodic pension cost for the supplemental retirement
income payments follow:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost................................................ $0.5 $0.2 $0.2
Interest cost............................................... 0.6 0.4 0.3
Net amortization and deferral............................... 0.2 0.2 0.2
---- ---- ----
Net pension cost....................................... $1.3 $0.8 $0.7
==== ==== ====
</TABLE>
Assumptions used to develop the net periodic pension costs were:
<TABLE>
<S> <C> <C> <C>
Discount rate............................................. 7.5% 8.0% 7.0%
Expected rate of salary increases......................... 5.0% 5.0% 0.0%
</TABLE>
The discount rate used to determine the accrued pension liability at
September 30, 1996, 1995 and 1994 was 7.5 percent, 7.5 percent and 8.0 percent,
respectively.
Post-retirement Benefits Other Than Pensions -- In connection with the
acquisition of certain of its facilities, the Company assumed a liability for
providing post-retirement medical coverage to age 65 for 96 salaried employees
who elected to take early retirement prior to June 30, 1987. In addition, the
Company has obligations to provide post-retirement medical benefits to age 65
pursuant to collective bargaining agreements at four of its facilities.
The net post-retirement benefit cost for Fiscal 1996, Fiscal 1995 and
Fiscal 1994 was $1.6 million, $0.3 million and $0.3 million, respectively. The
benefit cost for Fiscal 1996 includes a charge of $1.1 million for
post-retirement medical costs for retirees related to the staff reduction
program. The Company funds benefit costs on a pay-as-you-go basis, and, for
Fiscal 1996, Fiscal 1995 and Fiscal 1994, the Company made benefit payments of
approximately $0.7 million, $0.5 million and $0.5 million, respectively.
F-22
<PAGE> 95
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plan's funded status, reconciled with
amounts recognized in the Company's balance sheets.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Actuarial present value of post-retirement benefits:
Retirees................................................. $ 3.2 $ 3.8
Fully eligible active plan participants.................. 1.3 0.2
Other active plan participants........................... 0.3 0.5
----- -----
Accumulated post-retirement benefit obligation........ 4.8 4.5
Plan assets at market value.............................. -- --
----- -----
Accumulated post-retirement benefit obligation........ 4.8 4.5
Unrecognized net loss.................................... (1.2) (1.6)
----- -----
Accrued post-retirement benefit obligation............... $ 3.6 $ 2.9
===== =====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation at September 30, 1996 was 8.0 percent in 1997
declining 1.0 percent per year to 6.0 percent in 1999 and thereafter. The
assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation at September 30, 1995 was 9.0 percent in 1996
declining 1.0 percent per year to 6.0 percent in 1999 and thereafter. The
discount rate used in determining the accumulated post-retirement benefit
obligation at September 30, 1996 and 1995 was 7.5 percent. If the health care
cost trend rate assumptions were increased by 1 percent, the accumulated
post-retirement benefit obligation at September 30, 1996 would be increased by
approximately $0.1 million or 2 percent. The effect of this change on the sum of
the service cost and interest cost components of net periodic post-retirement
benefit costs would be an increase of approximately 3 percent.
Savings Plan -- In October 1987, the Company established a defined
contribution retirement savings plan (Section 401K Plan) covering substantially
all salaried employees of the Company subject to certain service requirements
for different aspects of participation. The Section 401K Plan provides for
employees to make contributions on a pre-tax basis up to a maximum of 15 percent
of their compensation (as defined) each year, with their maximum annual
contribution determined pursuant to Internal Revenue Service regulations. Prior
to January 1, 1994, the Company contributed to each participant's plan account
an amount equal to 50 percent of the participant's contribution up to a maximum
of 2 percent of the participant's compensation. Subsequent to January 1, 1994,
the Company contributed to each participant's plan account an amount equal to 75
percent of the participant's contribution up to a maximum of 3 percent of the
participant's compensation. The Company may also make additional discretionary
contributions to the Section 401K Plan. For Fiscal 1996, Fiscal 1995 and Fiscal
1994, the Company's cost relating to the Section 401K Plan was $5.1 million,
$1.6 million and $1.4 million, respectively. The Company's cost for Fiscal 1996
includes $3.5 million for deferred profit sharing contributions.
16. COMMITMENTS AND CONTINGENCIES
The Company has various agreements which provide for the purchase at market
prices of wood chips, hog fuel (bark and other residual fiber from trees) and
stumpage.
The Company has a commitment to sell electricity from its cogeneration
facility to a utility through 2013. The Company does not intend to terminate
this contract; however, if terminated, penalties of approximately $8.3 million
could be imposed.
F-23
<PAGE> 96
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has an agreement to sell at market prices approximately 130,000
tons per year (subject to annual adjustments, as defined) of unbleached kraft
paper to S&G Packaging. The agreement expires five years after the Company no
longer has an ownership interest in S&G Packaging.
The Company has an agreement to purchase at market prices through 1999 the
entire production of an unbleached kraft paper machine at a Riverwood
International U.S.A., Inc. pulp and paper mill. The capacity of this machine is
estimated to be 35,000 tons per year.
The Company has an agreement to purchase at market prices, through 2004,
approximately 24,000 tons per year of containerboard from Newark Group
Industries, Inc.
The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described below:
The Company and certain of its officers and directors have been named in a
civil suit filed in Cook County (Illinois) Circuit Court alleging that they
omitted or misrepresented facts about the Company's operations in connection
with the Company's initial public offering of stock in 1988 and in certain
periodic reports. The complaint, a purported class action, originally sought
unspecified damages under the Illinois Consumer Fraud and Deceptive Practices
Act and for common law fraud. On January 10, 1996, the court dismissed both
counts with prejudice, and plaintiff has appealed. A similar lawsuit, based on
the same factual allegations, but alleging violations of Federal securities laws
and filed in the United States District Court for the Northern District of
Illinois, was voluntarily dismissed by the same plaintiff in July 1993. The
Company believes that, after investigation of the facts, the allegations in the
complaint are without merit, and the Company is vigorously defending itself.
On October 18 and December 4, 1995, the Company, its directors and certain
of its officers were named in complaints in the Court of Chancery of the state
of Delaware alleging breach of fiduciary duties on two counts. The first is a
derivative count brought on behalf of the Company against the individual
defendants, and the second is a direct count brought on behalf of the Company's
stockholders. Each count alleges that the Company's stockholder Rights
Agreement, adopted on June 12, 1995, amendments to the Company's charter and
bylaws, adopted on July 21, 1995, and redemption of Warrants in July 1995 were
all designed to entrench the individual defendants in their capacities as
directors and officers at the expense of stockholders who otherwise would have
been able to take advantage of a sale of the Company. The complaint asks the
court, among other things, to rescind the amendments and to prohibit the use of
the stockholder Rights Agreement from discouraging any bona fide acquirer. The
Company believes the allegations are without merit and on January 16, 1996 moved
to dismiss the consolidated complaint. The motion is fully briefed and argued,
and the Company is awaiting a decision.
On October 23, 1995, a rail tank car exploded on the premises of the
Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a wholly owned,
independently operated subsidiary of the Company. The accident resulted in the
venting of certain chemicals, including by-products of nitrogen tetroxide, a raw
material used by the plant to produce dimethyl sulfoxide, a solvent used in the
manufacture of pharmaceutical and agricultural chemicals. More than 140 lawsuits
have been filed in both federal and state courts naming as defendants Gaylord
Chemical Corporation, and/or the Company, certain of their respective officers
and other unrelated corporations and individuals. The lawsuits, which seek
unspecified damages, allege personal injury, property damage, economic loss,
related injuries and fear of injuries as a result of the accident. On April 1,
1996, the federal judge dismissed all but one of the federal actions for failing
to state claims under federal law and remanded the remaining tort cases to the
district court in Washington Parish, Louisiana, where they have been
consolidated. The remaining federal action has been stayed.
On May 21, 1996, the Louisiana state court established a Plaintiff's
Liaison Committee (PLC) to coordinate and oversee the consolidated cases on
behalf of plaintiffs. On June 26, 1996, the PLC and defendants agreed to a Case
Management Order (CMO) that was subsequently entered by the Court.
F-24
<PAGE> 97
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to this CMO, the plaintiffs filed a single Consolidated Master Petition
against Gaylord Chemical Corporation, the Company and twenty-one other
defendants. In this Consolidated Master Petition all claims against the
individuals (including the officers of Gaylord Chemical Corporation and the
Company) have been dropped. Also, pursuant to the terms of the CMO, all of the
individual actions filed before the Consolidated Master Petition have been, or
shortly will be, dismissed. The Consolidated Master Petition includes
substantially all of the claims and theories asserted in the prior lawsuits,
including negligence and strict liability, as well as several claims of
statutory liability. Unspecified compensatory and punitive damages are sought.
The Company and its subsidiary are vigorously contesting all of these claims.
On July 15, 1996 the state court certified these consolidated actions as a
single class action. The class was tentatively defined to include all those
persons or entities who claim to have been injured as a result of the October
23, 1995 incident. This definition may be amended, or subclasses established,
depending on the results of discovery. Written and document discovery is
proceeding.
In June and July several individual plaintiffs filed supervisory writs
seeking to challenge the validity of the Court's (i) May 21, 1996 Order
establishing the PLC; (ii) June 26, 1996 CMO; and (iii) July 15, 1996 Order
certifying these consolidated cases as a class action. Some, but not all, of
these supervisory writs have been fully briefed. Subsequent rulings by the
Louisiana Supreme Court have upheld the CMO.
In addition, the Company, its subsidiary and numerous other third party
companies have been named as defendants in seven actions brought by plaintiffs
in Mississippi state court, including two that name more than 6,000 individual
claimants. This case is not filed as a class action but seeks to allege claims
similar to those in the Louisiana state court. Defendants in the Mississippi
case have filed a motion to sever the actions on grounds of misjoinder. The
Company and its subsidiary are vigorously contesting these claims.
The Company and its subsidiary maintain insurance and have filed separate
suits seeking a declaratory judgment of coverage for the October 23, 1995
accident against their general liability and directors and officers liability
insurance carriers. These cases are currently pending in state court with the
liability cases. The carrier with the first layer of coverage under the general
liability policy has agreed to pay the Company's and its subsidiary's defense
costs under a reservation of rights.
The Company believes that the outcome of all litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is required, however, in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The
F-25
<PAGE> 98
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
use of different market assumptions and/or methodologies could have a material
effect on the estimated fair value amounts. The estimated fair value of
financial instruments at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
-------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Assets
Cash and equivalents...................................... $ 39.2 $ 39.2
Trade receivables......................................... 111.0 111.0
Long-term notes receivable................................ 11.9 12.5
Liabilities
Trade payables............................................ 60.8 60.8
Senior and subordinated notes............................. 584.0 642.4
Capital lease obligations................................. 16.2 16.2
Other senior debt......................................... 34.2 34.7
</TABLE>
Cash and equivalents, trade receivables, trade payables and capital lease
obligations -- The carrying amount of these items are a reasonable estimate of
their fair value.
Senior and subordinated notes -- Estimated fair value is based on estimates
obtained from dealers/brokers.
Long-term notes receivable and other senior debt -- Interest rates that are
currently available to the Company for similar terms and remaining maturities
are used to estimate fair value.
The fair value estimates presented herein are based on pertinent
information available to the Company at September 30, 1996. Although the Company
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
The Company is not a party to any lending or borrowing arrangements that
are considered to be derivative financial instruments.
18. SUPPLEMENTAL CASH FLOW DISCLOSURES
The balance sheet effects of non-cash transactions which are not reflected
in the consolidated statements of cash flows and other supplemental cash flow
disclosures are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash paid for interest expense........................ $28.6 $35.5 $37.8
Cash paid for income taxes............................ 5.6 2.5 --
Supplemental schedule of non-cash investing and
financing activities:
Property additions.................................. 5.6 45.1 8.4
Increase in total debt.............................. 5.6 45.1 --
Increase in accrued and other liabilities........... -- -- 4.5
Increase in other long-term liabilities............. -- -- 3.9
Write-off of deferred financing fees................ 1.5 -- --
</TABLE>
F-26
<PAGE> 99
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------------------------
1ST 2ND 3RD 4TH YEAR
--- --- --- --- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL 1996
Net sales....................... $253.8 $219.3 $225.5 $223.4 $ 922.0
Gross margin.................... 74.8 45.2 43.8 42.0 205.8
Income (loss) before
extraordinary item............ 19.1 1.2 0.1 (8.6) 11.8
Extraordinary loss.............. (2.6) -- -- (0.6) (3.2)
Net income (loss)............... 16.5 1.2 0.1 (9.2) 8.6
Earnings per common and common
equivalent share:
Income (loss) before
extraordinary item......... 0.35 0.02 0.0 (0.16) 0.22
Extraordinary loss............ (0.05) -- -- (0.01) (0.06)
Net income (loss)............. 0.30 0.02 0.0 (0.17) 0.16
Weighted average common and
common equivalent shares
outstanding................... 55.0 55.1 55.1 53.6 54.7
Common stock price (AMEX)
High.......................... 10 3/8 11 5/8 11 1/2 7 15/16 11 5/8
Low........................... 7 1/16 7 1/2 7 11/16 5 3/8 5 3/8
Warrant price (AMEX)
High.......................... 9 3/8 10 7/8 10 7/8 7 11/16 10 7/8
Low........................... 6 1/2 7 1/4 7 5/8 5 3/4 5 3/4
FISCAL 1995
Net sales....................... $241.2 $256.3 $285.2 $268.7 $1,051.4
Gross margin.................... 57.1 74.5 85.4 79.4 296.4
Net income...................... 11.8 27.5 39.8 55.1 134.2
Net income per common and common
equivalent share.............. 0.21 0.51 0.72 1.00 2.44
Weighted average common and
common equivalent shares
outstanding................... 54.9 55.1 55.2 55.2 55.1
Common stock price (AMEX)
High.......................... 9 3/4 13 7/8 15 1/2 13 3/8 15 1/2
Low........................... 7 1/2 7 3/4 7 3/4 9 7 1/2
Warrant price (AMEX)
High.......................... 8 1/8 10 7/8 11 7/8 11 1/2 11 7/8
Low........................... 5 7/8 6 1/2 7 1/4 8 1/4 5 7/8
FISCAL 1994
Net sales....................... $183.9 $182.5 $203.2 $214.8 $ 784.4
Gross margin.................... 16.7 19.1 23.9 33.3 93.0
Net loss........................ (23.0) (22.6) (19.7) (18.7) (84.0)
Net loss per common and common
equivalent share.............. (0.43) (0.42) (0.37) (0.35) (1.57)
Weighted average common and
common equivalent shares
outstanding................... 53.5 53.6 53.6 53.7 53.6
Common stock price (AMEX)
High.......................... 4 3/4 6 7/8 6 1/4 8 3/4 8 3/4
Low........................... 2 4 3/8 4 3/8 5 1/4 2
Warrant price (AMEX)
High.......................... 4 5 3/8 4 3/4 7 1/8 7 1/8
Low........................... 1 5/8 3 1/4 3 1/8 3 7/8 1 5/8
</TABLE>
F-27
<PAGE> 100
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
-------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 6.9 $ 39.2
Trade receivables (less allowances of $7.4 million and
$6.9 million, respectively)............................ 104.1 111.0
Inventories (Note 2)...................................... 73.0 70.4
Deferred income taxes..................................... 5.1 5.1
Other current assets...................................... 17.2 10.4
-------- --------
Total current assets................................... 206.3 236.1
-------- --------
Property plant and equipment:
Property, plant and equipment, at cost.................... 1,053.9 1,033.3
Less accumulated depreciation............................. 463.4 421.0
-------- --------
Property -- net........................................ 590.5 612.3
-------- --------
Deferred income taxes....................................... 49.2 16.8
Other assets................................................ 67.0 67.8
-------- --------
Total Assets........................................... $ 913.0 $ 933.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 11.0 $ 11.3
Trade payables............................................ 54.7 60.8
Accrued interest payable.................................. 8.1 27.3
Accrued and other liabilities............................. 47.2 66.9
-------- --------
Total current liabilities.............................. 121.0 166.3
-------- --------
Long-term debt.............................................. 704.0 623.1
Other long-term liabilities................................. 27.9 29.1
Commitments and contingencies............................... -- --
Stockholders' equity:
Class A common stock -- par value, $.0001 per share;
authorized 125,000,000 shares; issued 54,450,934 shares
and 54,270,011 shares, respectively, and outstanding
52,898,674 shares and 52,688,233 shares,
respectively........................................... -- --
Capital in excess of par value.............................. 174.7 173.5
Retained deficit............................................ (101.9) (46.1)
Common stock in treasury -- at cost; 1,552,260 shares and
1,581,778 shares, respectively............................ (11.5) (11.7)
Recognition of minimum pension liability.................... (1.2) (1.2)
-------- --------
Total stockholders' equity............................. 60.1 114.5
-------- --------
Total liabilities and stockholders' equity............. $ 913.0 $ 933.0
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-28
<PAGE> 101
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
------------------------
1997 1996
---- ----
(IN MILLIONS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net Sales................................................... $ 577.4 $698.6
Cost of goods sold.......................................... 534.3 534.8
------- ------
Gross margin................................................ 43.1 163.8
Selling and administrative costs............................ (61.5) (71.4)
------- ------
Operating earnings.......................................... (18.4) 92.4
Interest expense -- net..................................... (60.0) (57.9)
Other income (expense) -- net............................... (0.8) 0.3
------- ------
Earnings (loss) before taxes and extraordinary item......... (79.2) 34.8
Income taxes................................................ (31.1) 14.4
------- ------
Earnings (loss) before extraordinary item................... (48.1) 20.4
Extraordinary loss (Note 4)................................. (7.7) (2.6)
------- ------
Net income (loss)........................................... (55.8) $ 17.8
======
Retained deficit:
Beginning of period....................................... (46.1)
-------
End of period............................................. $(101.9)
=======
Earnings per common and common equivalent share:
Earnings (loss) before extraordinary item................. $ (0.91) $ 0.37
Extraordinary loss (Note 4)............................... (0.15) (0.05)
------- ------
Net income (loss)......................................... $ (1.06) $ 0.32
======= ======
Average number of common and common equivalent shares
outstanding............................................... 52.8 55.1
======= ======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-29
<PAGE> 102
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
----------------------
1997 1996
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Earnings (loss) before extraordinary item............... $ (48.1) $ 20.4
Adjustments to reconcile earnings (loss) before
extraordinary item to net cash from operating
activities:
Depreciation and amortization........................ 49.1 48.6
Non-cash interest expense............................ -- 31.2
Deferred income taxes................................ (27.9) 13.7
Change in current assets and liabilities, excluding
acquisitions and dispositions...................... (46.0) 8.1
Other -- net......................................... 0.3 (3.6)
------- ------
Net cash provided by (used for) operations................ (72.6) 118.4
------- ------
CASH FLOWS FROM INVESTMENTS:
Capital expenditures.................................... (22.8) (39.4)
Capitalized interest.................................... (0.7) (0.5)
Other investments -- net................................ (0.2) 1.8
------- ------
Net cash used for investments............................. (23.7) (38.1)
------- ------
CASH FLOWS FROM FINANCING:
Senior debt -- repayments............................... (9.4) (12.5)
Early retirement of debt (Note 4)....................... (189.7) (66.8)
Issuance of senior notes (Note 4)....................... 225.0 --
Debt issuance costs..................................... (5.6) (1.5)
Revolver borrowings -- net.............................. 43.0 --
Other financing -- net.................................. 0.7 0.4
------- ------
Net cash provided by (used for) financing................. 64.0 (80.4)
------- ------
NET DECREASE IN CASH AND EQUIVALENTS...................... (32.3) (0.1)
Cash and equivalents, beginning of period................. 39.2 32.5
------- ------
Cash and equivalents, end of period....................... $ 6.9 $ 32.4
======= ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest............................................. $ 77.7 $ 27.4
======= ======
Income taxes......................................... $ 2.1 $ 2.9
======= ======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Write-off of deferred financing fees.................... $ 2.8 $ 1.4
======= ======
Property additions...................................... $ 0.8 $ 1.1
======= ======
Increase in total debt.................................. $ 0.8 $ 1.1
======= ======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-30
<PAGE> 103
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all normal and recurring adjustments
and accruals necessary to present fairly the financial position as of June 30,
1997 and the results of operations and cash flows for the nine months ended June
30, 1997 and 1996, including all the accounts of Gaylord Container Corporation
(including its subsidiaries, the Company), and are in conformity with Securities
and Exchange Commission Rule 10-01 of Regulation S-X. The financial statements
should be read in conjunction with the audited consolidated financial statements
and the notes thereto on Form 10-K for the fiscal year ended September 30, 1996.
Certain amounts in the consolidated statements of cash flows have been
reclassified to conform to the current year presentation.
2. INVENTORIES
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1997 1996
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(DOLLARS IN MILLIONS)
<S> <C> <C>
Inventories consist of:
Finished products.................................. $18.9 $16.3
In process......................................... 36.7 31.3
Raw materials...................................... 6.2 8.5
Supplies........................................... 14.4 14.3
----- -----
76.2 70.4
LIFO valuation adjustment.......................... (3.2) --
----- -----
Total......................................... $73.0 $70.4
===== =====
</TABLE>
3. CONTINGENCIES
The Company is not a party to any legal proceedings other than litigation
incidental to normal business activities, except as described below:
The Company and certain of its officers and directors have been named in a
civil suit filed in Cook County (Illinois) Circuit Court alleging that they
omitted or misrepresented facts about the Company's operations in connection
with the Company's initial public offering of stock in 1988 and in certain
periodic reports. The complaint, a purported class action, originally sought
unspecified damages under the Illinois Consumer Fraud and Deceptive Practices
Act and for common law fraud. On January 10, 1996, the court dismissed both
counts with prejudice, and plaintiff has appealed. A similar lawsuit, based on
the same factual allegations, but alleging violations of Federal securities laws
and filed in the United States District Court for the Northern District of
Illinois, was voluntarily dismissed by the same plaintiff in July 1993. The
Company believes that, after investigation of the facts, the allegations are
without merit, and the Company is vigorously defending itself.
On October 18 and December 4, 1995, the Company, its directors and certain
of its officers were named in complaints which have been consolidated in the
Court of Chancery of the state of Delaware alleging breach of fiduciary duties
on two counts. The first count is a putative class action and the second is an
alleged derivative claim brought on behalf of the Company against the individual
defendants. Both counts allege that the Company's stockholder Rights Agreement,
adopted on June 12, 1995, amendments to the Company's charter and by-laws,
adopted on July 21, 1995, and a redemption of Warrants in June 1995 all were
designed to entrench the individual defendants in their capacities as directors
and officers at the expense of stockholders who otherwise would have been able
to take advantage of a sale of the Company. The complaint asks the court, among
other things, to rescind the amendments and prohibit the use of the stockholder
Rights Agreement to discourage any bona fide acquirer. In the alternative, the
plaintiffs seek compensatory damages.
F-31
<PAGE> 104
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 19, 1996, the Delaware Chancery Court denied the Company's motion to
dismiss the complaint in its entirety. The case is now in the preliminary
discovery stage. The Company believes the allegations are without merit and is
defending itself vigorously.
On October 23, 1995, a rail tank car exploded on the premises of the
Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a wholly owned,
independently operated subsidiary of the Company. The accident resulted in the
venting of certain chemicals, including by-products of nitrogen tetroxide, a raw
material used by the plant to produce dimethyl sulfoxide, a solvent used in the
manufacture of pharmaceutical and agricultural chemicals. More than 160 lawsuits
have been filed in both federal and state courts naming as defendants Gaylord
Chemical Corporation and/or the Company, certain of their respective officers
and other unrelated corporations and individuals. The lawsuits, which seek
unspecified damages, allege personal injury, property damage, economic loss,
related injuries and fear of injuries as a result of the accident. On April 1,
1996, the federal judge dismissed all but one of the federal actions for failing
to state claims under federal law and remanded the remaining tort cases to the
district court in Washington Parish, Louisiana, where they have been
consolidated. Discovery in the remaining federal action, a suit to recover
alleged clean-up costs, was ordered coordinated with the Louisiana State action.
On May 21, 1996 the Louisiana state court established a Plaintiff's Liaison
Committee (PLC) to coordinate and oversee the consolidated cases on behalf of
plaintiffs. On June 26, 1996 the PLC and defendants agreed to a Case Management
Order (CMO) that was subsequently entered by the Court. Pursuant to the CMO, the
plaintiffs filed a single Consolidated Master Petition against Gaylord Chemical
Corporation, the Company and twenty-one other defendants. In the Consolidated
Master Petition all claims against individual defendants (including the officers
of Gaylord Chemical Corporation and the Company) were dropped. Also, pursuant to
the terms of the CMO, all of the individual actions filed before the
Consolidated Master Petition have been, or are scheduled to be, dismissed. The
Consolidated Master Petition includes substantially all of the claims and
theories asserted in the prior lawsuits, including negligence and strict
liability, as well as several claims of statutory liability. Unspecified
compensatory and punitive damages are sought. The Company and its subsidiaries
are vigorously contesting all of these claims.
On July 15, 1996 the Louisiana state court certified these consolidated
actions as a single class action. The class was tentatively defined to include
all those persons or entities who claim to have been injured as a result of the
October 23, 1995 accident. On March 27, 1997, the Louisiana Court of Appeal for
the First Circuit reversed the trial court's order granting class certification,
defining the class, approving class notice, requiring all notice forms be
notarized and appointing the plaintiffs' attorneys to the PLC. The Court of
Appeal ordered the trial court to conduct a new class certification hearing to
allow additional evidence on the adequacy of class representatives and class
counsel and instructed the trial court to create a concise geographic definition
of the class of individuals allegedly impacted. Finally, the Court of Appeal
instructed the trial judge to approve a new class notice form that permits the
use of notice of claim forms and/or proof of claim forms only after a
determination of liability, if any. The Louisiana Supreme Court declined to
review that decision. On May 23, 1997, the trial court reappointed the PLC, and
on June 20, 1997, a second CMO was filed. A class certification hearing was held
on July 28, 1997. The issue was not resolved and the hearing has been scheduled
to continue on August 21, 1997.
In addition, the Company, its subsidiary and numerous other third party
companies have been named as defendants in eleven actions brought by plaintiffs
in Mississippi state court, who claim injury as a result of the October 23, 1995
accident at the Bogalusa facility. Included among these cases are two actions
which purport to be on behalf of over 9,000 individuals. These cases are not
filed as a class action but have been consolidated before a single judge in
Hinds County, Mississippi. All of these cases seek to allege claims similar to
those in the Louisiana state court. To date, discovery in these consolidated
cases has been coordinated with the ongoing discovery in the Louisiana class
action. The Company and its subsidiary are vigorously contesting these claims.
F-32
<PAGE> 105
GAYLORD CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and its subsidiary maintain insurance and have filed separate
suits seeking a declaratory judgement of coverage for the October 23, 1995
accident against their general liability and directors and officers liability
insurance carriers. These cases are currently pending in Louisiana state court
with the liability cases. The carrier with the first layer of coverage under the
general liability policy has agreed to pay the Company's and its subsidiary's
defense costs under a reservation of rights. Discovery in these declaratory
judgment cases is proceeding. Five of the nine excess level insurers have moved
for summary judgment before the trial court claiming that coverage for the
accident is excluded because of a pollution exclusion contained in these
policies. The Company is vigorously opposing these motions.
The Company believes the outcome of such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
4. EXTRAORDINARY ITEM
During the third quarter of fiscal 1997, the Company issued $225 million
principal amount of 9 3/4% Senior Notes due 2007 and used the proceeds to redeem
and retire all its outstanding 11 1/2% Senior Notes ($179.7 million principal
amount) due 2001 and to repay borrowings under the revolving portion of its
credit facilities. In conjunction with the redemption, approximately $2.8
million of deferred financing fees were written off. The early retirement of
debt resulted in an extraordinary loss of $7.7 million, net of an income tax
benefit of $5.0 million.
During the first quarter of fiscal 1996, the Company repurchased and
retired approximately $65.3 million principal amount of its publicly traded debt
securities. In conjunction with the repurchase, approximately $1.4 million of
deferred financing fees were written off. The early retirement of debt resulted
in an extraordinary loss of $2.6 million, net of an income tax benefit of $1.8
million.
5. ADOPTION OF NEW ACCOUNTING STANDARD
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123) by electing to continue to apply the intrinsic value-based method of
accounting for stock-based compensation. The Company will provide, if material,
the required pro forma disclosures pertaining to its stock-based compensation in
its year-end fiscal 1997 financial statement footnotes.
F-33
<PAGE> 106
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 1
Risk Factors.......................... 12
The Company........................... 16
The Refinancing....................... 17
Use of Proceeds....................... 17
Capitalization........................ 18
Selected Historical and Pro Forma
Financial Data...................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 27
Description of Other Indebtedness and
Other Obligations................... 34
Description of Exchange Notes......... 38
The Exchange Offer.................... 57
Certain Federal Income Tax
Consequences........................ 65
Plan of Distribution.................. 65
Experts............................... 66
Legal Matters......................... 66
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
------------------------
PROSPECTUS
------------------------
$225,000,000
[GAYLORD LOGO]
GAYLORD
CONTAINER
CORPORATION
OFFER TO EXCHANGE ITS 9 3/4% SENIOR
NOTES DUE 2007, SERIES B, FOR ANY
AND ALL OF ITS OUTSTANDING 9 3/4%
SENIOR NOTES DUE 2007, SERIES A
SEPTEMBER 8, 1997
======================================================
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any persons who are, or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
or are threatened to be made, a party to any threatened, pending or completed
action or suit by or in the right of the corporation by reason of the fact that
such person was a director, officer, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director has actually and reasonably incurred.
Article IX of the Certificate of Incorporation, as amended and restated, of
the Company provides that no director of the corporation shall be liable to the
corporation or its stockholders for monetary damages arising from a breach of
fiduciary duty owed to the corporation or its stockholders to the fullest extent
permitted by the Delaware General Corporation Law.
Article IX of the Certificate of Incorporation, as amended and restated,
further provides that the Company shall indemnify and hold harmless, to the
fullest extent authorized by the Delaware General Corporation Law, each person
who was or is made a party or is threatened to be made a party to or is
otherwise involved (including involvement as a witness) in any action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that he or she is or was a director or officer of the corporation,
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan, whether the basis of such proceeding is alleged action in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators; provided,
however, that, except as provided below with respect to proceedings to enforce
rights to indemnification, the corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors. The right to indemnification is a contract right and includes the
right to be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition (advancement of expenses);
provided, however, that, if and to the extent that the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee
II-1
<PAGE> 108
benefit plan) shall be made only upon delivery to the corporation of an
undertaking by or on behalf of such indemnitee, to repay all amounts so advanced
if it shall ultimately be determined by final judicial decision from which there
is no further right to appeal than such indemnitee is not entitled to be
indemnified for such expenses.
Article IX of the Certificate of Incorporation, as amended and restated,
further provides that any person serving as a director, officer, employee or
agent of another corporation, partnership, joint venture or other enterprise, at
least 50% of whose equity interests are owned by the corporation, shall be
conclusively presumed to be serving in such capacity at the request of the
Company and, hence, subject to indemnification by the Company.
Article IX of the Certificate of Incorporation, as amended and restated,
further provides that persons who after the date of the adoption of Article IX
become or remain directors or officers of the corporation or who, while a
director or officer of the corporation, become or remain a director, officer,
employee or agent of a subsidiary, shall be conclusively presumed to have relied
on the rights to indemnity, advancement of expenses and other rights contained
in Article IX in entering into or continuing such service. The rights to
indemnification and to the advancement of expenses conferred in Article IX shall
apply to claims made against a indemnitee arising out of acts or omissions which
occurred or occur both prior and subsequent to the adoption hereof. The rights
to indemnification and to the advancement of expenses conferred in Article IX
shall not be exclusive of any other right which any person may have or hereafter
acquire under the Amended and Restated Certificate of Incorporation or under any
statute, bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Article IX of the Certificate of Incorporation, as amended and restated,
further provides that the corporation may maintain insurance, at its own
expense, to protect itself any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expenses,
liability or loss under the Delaware General Corporation Law.
All of the directors and officers of the Company are covered by insurance
policies maintained and held in effect by such corporation against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Each Exhibit is listed according to the number assigned to it in the
Exhibit Table of Item 601 of Regulation S-K. The Exhibit index indicates the
page number in the sequential numbering system where such exhibit can be found.
Where exhibits are incorporated by reference, this fact is noted in the exhibit
index.
(A) EXHIBITS.
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1.1 Purchase Agreement, incorporated by reference to Exhibit 1.1
of the Company's Registration Statement on Form S-4 (No.
333-30423) filed under the Securities Act of 1933, as
amended (the 1997 Debt Registration Statement)
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<PAGE> 109
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3.1 Amended and Restated Certificate of Incorporation of the
Company, as of July 27, 1995, incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
(No. 1-9915) for the quarter ended June 30, 1995 filed under
the Securities Exchange Act of 1934, as amended (the June
30, 1995 Form 10-Q)
3.2 Amended and Restated Bylaws of the Company, as amended,
incorporated by reference to Exhibit 3.1 of the Company's
Current Report on Form 8-K filed on July 5, 1995 under the
Securities Act of 1934, as amended (the July 5, 1995 Form
8-K)
4.1 Indenture dated as of June 12, 1997 among the Company and
State Street Bank and Trust Company, as successor to Fleet
National Bank, as trustee, (Including the forms of Series A
and Series B 9 3/4% Senior Notes), incorporated by reference
to Exhibit 4.1 of the 1997 Debt Registration Statement
4.2 Amended and Restated Credit Agreement dated as of June 30,
1995 by and between the Company, the financial institutions
signatory thereto, Bankers Trust Company, as agent and
Co-Manager and Wells Fargo Bank National Association, as
Co-Manager, incorporated by reference to Exhibit 4.1 of the
June 30, 1995 Form 10-Q
4.3 First Amendment to Amended and Restated Credit Agreement
dated as of May 30, 1996 by and between the Company, the
financial institutions signatory thereto, Bankers Trust
Company, as agent and Co-Manager and Wells Fargo Bank
National Association, as Co-Manager, incorporated by
reference to Exhibit 4.1 of the Company's Quarterly Report
on Form 10-Q (No. 1-9915) for the quarter ended June 30,
1996 filed under the Securities Exchange Act of 1934, as
amended (the June 30, 1996 Form 10-Q)
4.4 Second Amendment to Amended and Restated Credit Agreement
dated as of July 19, 1996 by and between the Company, the
financial institutions signatory thereto, Bankers Trust
Company, as agent, incorporated by reference to Exhibit 4.2
of June 30, 1996 Form 10-Q
4.5 Third Amendment to Amended and Restated Credit Agreement
dated as of May 20, 1997 by and between the Company, the
financial institutions signatory thereto, Bankers Trust
Company, incorporated by reference to Exhibit 4.5 of the
1997 Debt Registration Statement
4.6 Fourth Amendment to Amended and Restated Credit Agreement
dated as of June 6, 1997 by and between the Company, the
financial institutions signatory thereto, Bankers Trust
Company, incorporated by reference to Exhibit 4.6 of the
1997 Debt Registration Statement
4.7 Registration Rights Agreement dated as of June 5, 1997 among
the Company, BT Securities Corporation, Bear, Stearns & Co.
Inc. and Salomon Brothers Inc., incorporated by reference to
Exhibit 4.7 of the 1997 Debt Registration Statement
4.8 Credit agreement dated as of October 31, 1989 between the
Company and the Export-Import Bank of the United States
incorporated by reference to Exhibit 4.21 of the Company's
Annual Report on Form 10-K (No. 1-9915) for the year ended
September 30, 1990, filed under the Securities Exchange Act
of 1934, as amended
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4.9 Specimen Certificate for the Class A Common Stock, par value
$.0001 per share, of the Company, incorporated by reference
to Exhibit 4.5 of the Company's Current Report on Form 8-K
filed on October 30, 1992 under the Securities Exchange Act
of 1934, as amended (October 30, 1992 Form 8-K)
4.10 Warrant Agreement between the Company and Harris Trust and
Savings Bank, as Warrant Agent, relating to the Company's
Redeemable Exchangeable Warrants, incorporated by reference
to Exhibit 4.3 of the October 30, 1992 Form 8-K
4.11 Specimen Certificate for the Redeemable Exchangeable
Warrants of the Company, incorporated by reference to
Exhibit 4.6 of the October 30, 1992 Form 8-K
4.12 Trust Agreement between the Company and Harris Trust and
Savings Bank, as Warrant Agent, relating to the Class A
Common Stock obtainable upon exercise of the Redeemable
Exchangeable Warrants, incorporated by reference to Exhibit
4.4 of the October 30, 1992 Form 8-K
4.13 Rights Agreement, dated June 12, 1995, between the Company
and Harris Trust and Savings Bank as Rights agent, including
the form of Certificate of Designation, Preferences and
Rights of Junior Participating Preferred Stock, Series A,
attached thereto, as Exhibit A, the form of Rights
Certificate attached thereto as Exhibit B and the Summary of
Rights attached thereto as Exhibit C, incorporated by
reference to Exhibit 4.1 of the July 5, 1995 Form 8-K
4.14 Form of Indenture between the Company and Shawmut Bank
Connecticut, National Association as Trustee, relating to
the Company's 11 1/2% Senior Notes Due 2001, incorporated by
reference to Exhibit 4(a) of the Company's Registration
Statement on Form S-3 (No. 33-60016), as amended, filed
under the Securities Act of 1933, as amended (the 1993 Debt
Registration Statement)
4.15 Specimen Certificate of the Company's 11 1/2% Senior Notes
Due 2001, incorporated by reference to Exhibit 4(b) of the
1993 Debt Registration Statement
4.16 Form of Indenture between the Company and Ameritrust Texas,
National Association as Trustee, relating to the Company's
12 3/4% Senior Subordinated Discount Debentures Due 2005,
incorporated by reference to Exhibit 4(c) of the 1993 Debt
Registration Statement
4.17 Specimen Certificate of the Company's 12 3/4% Senior
Subordinated Discount Debentures Due 2005, incorporated by
reference to Exhibit 4(d) of the 1993 Debt Registration
Statement
4.18 Subscription and Stockholder Agreement dated as of September
24, 1993 between the Company and Gaylord Receivables
Corporation, incorporated by reference to Exhibit 4.13 of
the Company's Annual Report on Form 10-K (No. 1-9915) for
the year ended September 30, 1993, filed under the
Securities Exchange Act of 1934, as amended (the 1993 Form
10-K)
4.19 Receivables Purchase Agreement dated as of September 24,
1993 between the Company and Gaylord Receivables
Corporation, incorporated by reference to Exhibit 4.14 of
the 1993 Form 10-K
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4.20 Amendment No.1 to Receivables Purchase Agreement dated as of
November 7, 1996 between the Company and Gaylord Receivables
Corporation, incorporated by reference to Exhibit 4.16 of
the Company's Annual Report on Form 10-K (No. 1-9915) for
the year ended September 30, 1996, filed under the
Securities Exchange Act of 1934, as amended (the 1996 Form
10-K)
4.21 Gaylord Receivables Master Pooling and Servicing Agreement
dated as of September 24, 1993 between the Company and
Gaylord Receivables Corporation, incorporated by reference
to Exhibit 4.15 of the 1993 Form 10-K
4.22 Revolving Credit Agreement dated as of September 24, 1993
between Gaylord Receivables Corporation, the financial
institutions signatory thereto and Harris Trust and Savings
Bank as Facility Agent, incorporated by reference to Exhibit
4.16 of the 1993 Form 10-K
4.23 Extension of Credit Agreement dated as of September 27, 1996
between Gaylord Receivables Corporation, the financial
institutions signatory thereto and Harris Trust and Savings
Bank as Facility Agent, incorporated by reference to Exhibit
4.19 of the 1996 Form 10-K
4.24 Security Agreement dated as of September 24, 1993 between
Gaylord Receivables Corporation and Harris Trust and Savings
Bank, incorporated by reference to Exhibit 4.17 of the 1993
Form 10-K
4.25 Series 1993-1 A-RI Supplemental Issuance Agreement dated as
of September 24, 1993 by and between the Company, Gaylord
Receivables Corporation and Manufacturers and Traders Trust
Company, as Trustee, incorporated by reference to Exhibit
4.1 of the Company's Quarterly Report on Form 10-Q (No.
1-9915) for the quarter ended December 31, 1993, filed under
the Securities Exchange Act of 1934, as amended
5.1 Opinion and consent of Kirkland & Ellis, incorporated by
reference to Exhibit 5.1 of the Company's Amendment No. 1 to
Form S-4 Registration Statement (No. 333-30423) filed under
the Securities Act of 1933, as amended (the 1997 Amendment
No. 1 Debt Registration Statement)
10.1 Bogalusa Hog Fuel Supply Agreement by and between the
Company and Cavenham Forest Industries, Inc. dated as of
March 28, 1986, incorporated by reference to Exhibit 10.8 of
the Company's Registration Statement on Form S-1 (No.
33-13455), as amended, filed under the Securities Act of
1933, as amended (the 1986 Debt Registration Statement)
10.2 Bogalusa Hog Fuel Supply Agreement (St. Francisville) by and
between the Company and Crown Zellerbach Corporation dated
as of March 31, 1986, incorporated by reference to Exhibit
10.9 of the 1986 Debt Registration Statement
10.3 Bogalusa Sawmill Agreement by and between the Company and
Cavenham Forest Industries, Inc. dated as of March 28, 1986,
incorporated by reference to Exhibit 10.11 of the 1986 Debt
Registration Statement
10.4 Bogalusa Timberland Agreement by and between the Company and
Cavenham Forest Industries, Inc. dated as of March 28, 1986,
incorporated by reference to Exhibit 10.12 of the 1986 Debt
Registration Statement
10.5 Transfer and Assumption Agreement by and between the Company
and Gaylord Container Limited dated as of November 17, 1986,
incorporated by reference to Exhibit 10.16 of the 1986 Debt
Registration Statement
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10.6 Undertaking by and between the Company and Crown Zellerbach Corporation dated as of
May 2, 1986, incorporated by reference to Exhibit 10.17 of the 1986 Debt Registration
Statement
10.7 Transaction Agreement by and between James River Corporation of Virginia and Crown
Zellerbach Corporation dated as of December 14, 1985, incorporated by reference to
Exhibit 10.18 of the 1986 Debt Registration Statement
10.8 Stockholder Agreement by and among the Company and the Persons listed on the signature
pages thereto dated as of June 1, 1988, incorporated by reference to Exhibit 10.22 of
the Company's Registration Statement on Form S-1 (No. 33-21227), as amended, filed
under the Securities Act of 1933, as amended (the 1988 Debt Registration Statement)
10.9 Agreement among the Company and the Persons listed on the signature pages thereto
dated as of June 1, 1988, incorporated by reference to Exhibit 10.23 of the 1988 Debt
Registration Statement
10.10.. Bogalusa Roundwood Supply and Cutting Rights Agreement by and between the Company and
Cavenham Forest Industries, Inc. dated as of March 28, 1986, incorporated by reference
to Exhibit 10.10 of the 1986 Debt Registration Statement
10.11.. Letters dated March 1, 1991 and March 19, 1991 between the Company and Cavenham Forest
Industries Inc., amending the Bogalusa Roundwood Supply and Cutting Rights Agreement
dated as of March 28, 1986, incorporated by reference to Exhibit 10(e) of the
Company's Proxy Statement - Prospectus on Form S-4 (No. 33-41799) as amended, filed
under the Securities Act of 1933, as amended (the 1991 Proxy Statement - Prospectus)
10.12.. Bogalusa Wood Chip Supply Agreement by and between the Company and Cavenham Forest
Industries, Inc., dated as of March 28, 1986, incorporated by reference to Exhibit
10.13 of the 1986 Debt Registration Statement
10.13.. Letters dated March 1, 1991 and March 19, 1991 between the Company and Cavenham Forest
Industries, Inc. amending the Bogalusa Wood Chip Supply Agreement dated as of March
28, 1986, incorporated by reference to Exhibit 10(i) of the 1991 Proxy Statement -
Prospectus
10.14.. Power Purchase Agreement by and between Pacific Gas & Electric Company and Crown
Zellerbach Corporation dated as of December 29, 1982, incorporated by reference to
Exhibit 10.14 of the 1986 Debt Registration Statement
10.15.. Indemnification Agreement by and between the Company, Crown Zellerbach Corporation and
Cavenham Forest Industries, Inc. dated as of November 17, 1986 regarding Power
Purchase Agreement by and between Pacific Gas & Electric Company and Crown Zellerbach
Corporation dated as of December 29, 1982, incorporated by reference to Exhibit 10.15
of the 1986 Debt Registration Statement
10.16.. Employment Agreement by and between the Company and Marvin A. Pomerantz dated as of
May 18, 1988, incorporated by reference to Exhibit 10.1 of the 1988 Debt Registration
Statement*
</TABLE>
II-6
<PAGE> 113
<TABLE>
<CAPTION>
LOCATION OF DOCUMENT
IN SEQUENTIAL
NUMBERING SYSTEM
--------------------
<C> <S> <C>
10.17.. Amendment No. 1 to Employment Agreement between the Company and Marvin A. Pomerantz
dated February 8, 1989, incorporated by reference to Exhibit 10.25 of the Company's
Registration Statement on Form S-1 (No. 33-29722), as amended, filed under the
Securities Act of 1933, as amended (the 1989 Debt Registration Statement)*
10.18.. Employment Agreement by and between the Company and Marvin A. Pomerantz dated June 1,
1997, incorporated by reference to Exhibit 10.18 of the 1997 Debt Registration
Statement*
10.19.. Employment Agreement by and between the Company and Warren J. Hayford dated as of May
18, 1988, incorporated by reference to Exhibit 10.2 of the 1988 Debt Registration
Statement*
10.20.. Amendment No. 1 to Employment Agreement between the Company and Warren J. Hayford
dated February 8, 1989, incorporated by reference to Exhibit 10.26 of the 1989 Debt
Registration Statement*
10.21.. Employment Letter Agreement by and between the Company and Dale E. Stahl, dated as of
November 22, 1993, incorporated by reference to Exhibit 10.25 of the 1993 Form 10-K*
10.22.. Employment Letter Agreement by and between the Company and Daniel P. Casey, dated as
of November 22, 1993, incorporated by reference to Exhibit 10.27 of the 1993 Form
10-K*
10.23.. Employment Letter Agreement by and between the Company and Lawrence G. Rogna, dated as
of November 22, 1993, incorporated by reference to Exhibit 10.29 of the 1993 Form
10-K*
10.24.. Stock Retention Agreement dated June 25, 1992 between the Company and Mid-America
Group, Ltd., incorporated by reference to Exhibit 10(nn) of the 1991 Proxy Statement
-- Prospectus
10.25.. Stock Retention Agreement dated June 25, 1992 between the Company and Warren J.
Hayford, incorporated by reference to Exhibit 10(pp) of the 1991 Proxy Statement --
Prospectus
10.26 S&G Packaging Company, L.L.C. Joint Venture Agreement dated as of July 12, 1996 by and
between the Company and Stone Container Corporation incorporated by reference to
Exhibit 10.1 of the June 1996 Form 10-Q
10.27 S&G Packaging Company, L.L.C. Limited Liability Company Agreement dated as of July 12,
1996 incorporated by reference to Exhibit 10.2 of the June 1996 Form 10-Q
10.28 Gaylord Container Corporation 1987 Key Employee Stock Option Plan, incorporated by
reference to Exhibit 28 of the Company's Registration Statement on Form S-8 (No.
33-25675) filed under the Securities Act of 1933, as amended*
10.29 Gaylord Container Corporation 1989 Long-Term Incentive Plan, incorporated by reference
to Exhibit 28.1 of the Company's Registration Statement on Form S-8 (No. 33-33977)
filed under the Securities Act of 1933, as amended*
10.30 Gaylord Container Corporation Outside Director Stock Option Plan, incorporated by
reference to Exhibit 28 of the Company's Registration Statement on Form S-8 (No.
33-33871) filed under the Securities Act of 1933, as amended*
</TABLE>
II-7
<PAGE> 114
<TABLE>
<CAPTION>
LOCATION OF DOCUMENT
IN SEQUENTIAL
NUMBERING SYSTEM
-------------------------
<S> <C> <C>
10.31 Description of Gaylord Container Corporation Management Incentive Plan*...
10.32 Gaylord Container Corporation Shareholder Value Plan, incorporated by reference to
Exhibit A of the Company's Proxy Statement for its 1994 Annual Meeting filed December
10, 1993*
10.33 Gaylord Container Corporation Supplemental Retirement Plan*...........................
10.34 Gaylord Container Corporation 1997 Long-Term Equity Incentive Plan incorporated by
reference to Appendix A to the Definitive Proxy Statement filed December 24, 1996.*
10.35 Gaylord Container Corporation Supplemental Executive Retirement Plan incorporated by
reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K (No. 1-9915)
for the year ended September 30, 1995, filed under the Securities Exchange Act of
1934, as amended (the 1995 Form 10-K)*
12.1 Statement Regarding Computation of Ratios of Earnings to Fixed Charges, incorporated
by reference to Exhibit 12.1 of the Company's Amendment No. 2 to Form S-4 Registration
Statement (No. 333-30423) filed under the Securities Act of 1933, as amended.
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit 21.1 of the 1997
Amendment No. 1 Debt Registration Statement
23.1 Consent of Deloitte & Touche LLP......................................................
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1)
24.1 Power of Attorney, incorporated by reference to Exhibit 24.1 of the 1997 Debt
Registration Statement
25.1 Statement of Eligibility of Trustee on Form T-1, incorporated by reference to Exhibit
25.1 of the 1997 Amendment No. 1 Debt Registration Statement
27.1 Financial Data Schedule, incorporated by reference to Exhibit 27.1 of the 1996 Form
10-K
27.2 Financial Data Schedule, incorporated by reference to Exhibit 27.1 of the Company's
Quarterly Report on Form 10-Q (No. 1-9915) for the quarter ended June 30, 1997 filed
under the Securities Exchange Act of 1934, as amended
99.1 Form of Letter of Transmittal, incorporated by reference to Exhibit 99.1 of the 1997
Debt Registration Statement
99.2 Form of Notice of Guaranteed Delivery, incorporated by reference to Exhibit 99.2 of
the 1997 Debt Registration Statement
99.3 Form of Tender Instructions, incorporated by reference to Exhibit 99.3 of the 1997
Debt Registration Statement
</TABLE>
- -------------------------
* Management contract or compensatory plan or arrangement.
(B) FINANCIAL STATEMENT SCHEDULES.
Schedules are omitted because they are not required or are not applicable.
II-8
<PAGE> 115
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered,
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a directors, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-9
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Gaylord
Container Corporation has duly caused this Registration Statement on Form S-4 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, State of Illinois, on September 8, 1997.
GAYLORD CONTAINER CORPORATION
By: /s/ MARVIN A. POMERANTZ
------------------------------------
Marvin A. Pomerantz
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed on September 8, 1997 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MARVIN A. POMERANTZ Chairman, Chief Executive Officer and
- -------------------------------------------------------- Director (Principal Executive Officer)
Marvin A. Pomerantz
/s/ DANIEL P. CASEY Executive Vice President (Principal
- -------------------------------------------------------- Financial Officer)
Daniel P. Casey
/s/ JEFFREY B. PARK Vice President-Corporate Controller
- -------------------------------------------------------- (Principal Accounting Officer)
Jeffrey B. Park
* Director
- --------------------------------------------------------
Mary Sue Coleman
* Director
- --------------------------------------------------------
Harve A. Ferrill
* Director
- --------------------------------------------------------
John E. Goodenow
* Director
- --------------------------------------------------------
David B. Hawkins
* Director
- --------------------------------------------------------
John Hawkinson
* Director
- --------------------------------------------------------
Warren J. Hayford
* Director
- --------------------------------------------------------
Richard S. Levitt
</TABLE>
II-10
<PAGE> 117
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Director
- --------------------------------------------------------
Ralph L. MacDonald Jr.
* Director
- --------------------------------------------------------
Thomas H. Stoner
</TABLE>
- -------------------------
* The undersigned, by signing his name hereto, does sign and execute this
Registration Statement on Form S-4 on behalf of the above named officers and
directors of the Company pursuant to the Power of Attorney executed by such
officers and directors and filed with the Securities and Exchange Commission.
/s/ DANIEL P. CASEY
- ------------------------------
Daniel P. Casey
Attorney-in-fact
II-11
<PAGE> 1
Exhibit 10.31
CORPORATE MANAGEMENT INCENTIVE PLAN
Background
The Company seeks to provide levels of management compensation that are
competitive at expected levels of individual and Company performance.
Competitiveness is defined as in keeping with the compensation of managers in
comparable positions and who have similar qualifications. The comparison group
for those managers is companies similar to the Company in industry and size.
The Company believes that making a significant portion of total pay contingent
on performance, or variable, is an effective overall approach. The Company
believes in rewarding top performance with industry leading total compensation.
Objectives
. Enable Gaylord to attract and retain high quality, results-oriented managers.
. Provide a strong link between pay and performance.
. Establish quantifiable, measurable objectives which support the overall
mission of the business.
. Recognize the cyclical nature of the business.
Participants
All individuals assigned to a Corporate function whose positions have been
assessed above a specified salary grade are designated participants in the
Plan. For fiscal year 1997, there are 47 participants which is typical of the
past several years. All officers of the Company are included in this Plan with
the exception of the Chairman and Chief Executive Officer.
A target incentive opportunity is established for each position based on the
participant's opportunity to impact the Company results and to provide a
competitive level of variable pay opportunity. Target incentive opportunities
range from 15% to 50% of base salary.
Performance Management
The Plan is designed to ensure that incentive compensation varies in a
consistent and predictable manner with the Company's operating and financial
performance. Performance targets and
<PAGE> 2
related amounts to be paid to plan participants if the targets are achieved are
determined annually by the Board of Directors. Targets have been established
for fiscal 1997 based on the Company's earnings before interest, income taxes,
depreciation and amortization (EBITDA). EBITDA has been used for the past
three fiscal years and is expected to remain the primary performance
measurement for fiscal 1998 and 1999. The use of EBITDA as the primary
performance measure reinforces cash flow as the most critical factor in gauging
the success of overall operations at the corporate level and recognizes the
highly cyclical nature of the industry.
Process
The annual award pool is funded based on 1.6% of EBITDA. A minimum of $100
million EBITDA must be achieved for a pool to be established. The pool is
distributed based on each participant's target opportunity and individual
performance.
To receive an award, an individual must be actively employed by the Company in
an eligible position at the time of the payout. Base salary is determined as
of the last day of the fiscal year and the individual must have served in
eligible positions for at least the final six months of the fiscal year. A
participant in the Plan for at least the minimum six months, but less than the
full year, will receive a pro-rated award for the portion of the year during
which they participated.
<PAGE> 1
Exhibit 10.33
GAYLORD CONTAINER CORPORATION
SUPPLEMENTAL EXCUTIVE RETIREMENT PLAN
ARTICLE 1
Introduction
1.1 The Plan and Its Effective Date. Gaylord Container Corporation
Supplemental Executive Retirement Plan (the "Plan") has been established by
Gaylord Container Corporation, a Delaware corporation (the "company"),
effective June 1, 1995 (the "effective date").
1.2 Purpose. The Company maintains the Gaylord Container Retirement Plan
(the "retirement plan"), which is intended to meet the requirements of a
"qualified plan" under the Internal Revenue Code. The purpose of this Plan is
to provide to a select group of management or highly compensated employees
benefits in addition to those provided under the retirement plan.
ARTICLE 2
Participation and Benefits
2.1 Eligibility. The persons designated by the Compensation Committee of
the Board of Directors (the "committee"), shall be participants in the plan.
On the effective date, the following persons have been designated as
participants;
<TABLE>
<CAPTION>
<S> <C>
Dale E. Stahl President and Chief Operating
Officer
Daniel P. Casey Executive Vice President and
Chief Financial Officer
Lawrence G. Rogna Senior Vice President
R. Bruce Grimm Vice President, Primary Products
Sales & Marketing
</TABLE>
2.2 Normal Benefits. Subject to the provisions of section 2.3 of the
plan and the conditions and limitations of the plan, a participant shall be
entitled to receive under this plan an annual pension benefit in an amount
equal to the excess of (a) over (b) below:
(a) the participant's "final average pay" multiplied by the
"applicable percentage."
<PAGE> 2
(b) the benefit payable under the retirement plan plus the
participant's annual primary Social Security benefit, as defined in the
retirement plan.
A participant's final average pay shall be the average of the
participant's base salary plus incentive awards, excluding awards under the
Shareholder Value Plan, for each of the four calendar years during the last
seven calendar years of the participant's employment for which such total base
salary plus incentive awards received by such participant was greatest.
A participant's applicable percentage shall be determined in accordance
with the following table, based on the participant's age on the date of
termination of employment.
<TABLE>
<CAPTION>
Age % Final Average Pay
--- -------------------
<S> <C>
65 60%
64 57.5
63 55
62 50
61 45
60 40
55 35
</TABLE>
2.3 Termination Prior to Age 55. A participant who retires or terminates
employment on or after age 55 with five years of service shall be entitled to
the normal age 55 benefit set forth in section 2.2. If a participant
terminates employment prior to age 55 with five years of service, his benefit
shall be his normal age 55 benefit multiplied by a fraction, the
numerator of which is his actual years of service and the denominator of which
is the number of years of service he would have if he terminated employment on
the day he attains age 55.
If a participant terminates employment before being credited with five
years of service, his benefit shall be further reduced in accordance with the
following schedule:
<TABLE>
<CAPTION>
Years of Service % of Benefit Payable
---------------- --------------------
<S> <C>
1 20%
2 40
3 60
4 80
</TABLE>
2.4 Change in Control. Notwithstanding anything herein, in the event of
a "change in control," the right of a participant to elect a lump sum payment
shall be absolute and not subject to the consent of the committee and the
benefit payable to a participant who has not attained age 55 shall be the
normal age 55 benefit without the reduction set forth in section 2.3. A
"change in control" shall be deemed to have occurred if and when
-2-
<PAGE> 3
(a) any person (as such term is defined in Section 3(a)(9), 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934) is or becomes a beneficial owner,
directly or indirectly, of securities of the company representing 25% or more
of the combined voting power of the company's then outstanding securities, or
(b) during any period of 24 consecutive months, commencing before or after the
date of the "change in control," individuals who at the beginning of such
24-month period were directors of the company cease for any reason to constitute
at least a majority of the Board of Directors of the company.
2.5 Pre-retirement Death Benefit. If a participant dies before he has
begun to receive benefits under the plan, his spouse shall receive a lump sum
payment in the amount equal to 50% of the present actuarial value of the
participant's benefit payable as if he had retired or terminated employment on
the date of his death.
2.6 Payment of Benefits. A participant's benefit under this plan shall
be paid to him, and in the event of his death prior to his receipt of all
benefits payable under the plan, to his beneficiary, in the normal or optional
form of payment elected by or otherwise applicable to participant under the
retirement plan; provided that participant may elect at any time prior to
retirement to receive payment in a lump sum; provided, further, that such
election must be on file with the company prior to the first day of the year in
which the participant retires or otherwise terminates his employment and
provided, further, that such lump sum election shall be permitted only with
the consent of the committee at its sole discretion. In calculating the amount
of a lump sum or installment payments, actuarial equivalence shall be
calculated based on the actuarial assumptions as set forth in section 7.5 of
the retirement plan; provided, that if the lump sum payment as calculated in
accordance with section 7.5 of the retirement plan is in excess of $25,000, the
amount payable as a lump sum shall be recalculated using an interest rate equal
to 120% of the interest rate specified in the retirement plan; provided,
further, that in no event shall the value determined in such recalculation be
less than $25,000.
2.7 Funding. Benefits payable under this plan to a participant or his
beneficiary shall be paid directly by the company. The company shall not be
required to segregate on its books or otherwise any amount to be used for
payment of benefits under this plan.
2.8 Termination for Serious Misconduct. In the event a participant is
terminated for serious misconduct, as defined below, no amount shall be payable
to such participant under the plan. "Serious Misconduct" means embezzlement or
misappropriation of corporate funds, other acts of dishonesty, commission of a
felony, willful refusal to perform or substantial
-3-
<PAGE> 4
disregard of the duties imposed by his employment contract with Gaylord,
significant violation of any statutory or common law duty of loyalty to
Gaylord, or repeated acts tending to bring Gaylord into public disgrace or
disrepute, including but not limited to, alcohol, drug or other substance
abuse.
ARTICLE 3
General Provisions
3.1 Committee. This plan shall be administered by the committee
responsible for administration of the retirement plan. The committee shall
have, to the extent appropriate, the same powers, rights, duties and
obligations with respect to this plan as it has with respect to the retirement
plan.
3.2 Beneficiary. A participant's "beneficiary" under this plan means
any person who becomes entitled to benefits under the retirement plan because
of the participant's death; provided that, if a participant dies while his
benefits under this plan are payable to him in installments, his beneficiary
under this plan shall be either (i) the person or persons designated by him by
signing and filing a beneficiary designation form in the time and manner
prescribed by the committee or if the beneficiary designated in (i) above dies
before the date of the participant's death, any one or more of the
participant's estate and his relatives by blood or marriage, in such
proportions as the committee shall determine.
3.3 Employment Rights. Establishment of the plan shall not be
construed to give any participant the right to be retained in the company's
service or to any benefits not specifically provided by the plan.
3.4 Interests Not Transferable. Except as to withholding of any tax
under the laws of the United States or any state, the interests of the
participants and their beneficiaries under the plan are not subject to the
claims of their creditors and may not be voluntarily or involuntarily
transferred, assigned, alienated or encumbered. No participant shall have any
right to any benefit payments hereunder prior to his termination of employment
with the company and all other Gaylord Companies, as defined in the retirement
plan.
3.5 Payment with Respect to Incapacitated Participants or
Beneficiaries. If any person entitled to benefits under the plan is under a
legal disability or in the committee's opinion is incapacitated in any way so
as to be unable to manage his financial affairs, the committee may direct the
payment of such benefit to such person's legal representative or to a relative
or friend of such person for such person's benefit, or the committee may direct
the application of such benefits for the benefit of
-4-
<PAGE> 5
such person in any manner which the committee may select that is consistent
with the plan. Any payments made in accordance with the foregoing provisions
of this section shall be a full and complete discharge of any liability for
such payments.
3.6 Limitation of Liability. To the extent permitted by law, no
person (including the company, its Board of Directors, the committee, any
present or former member of the company's Board of Directors or the committee,
and any present or former officer of the company) shall be personally liable
for any act done or omitted to be done in good faith in the administration of
the plan.
3.7 Controlling Law. The laws of Illinois shall be controlling in
all matters relating to the plan.
3.8 Gender and Number. Where the context admits, words in the
masculine gender shall include the feminine gender, the plural shall include
the singular and the singular shall include the plural.
3.9 Action by the Company. Any action required of or permitted by
the company under the plan shall be by resolution of the committee.
3.10 Successor to the Company. The term "company" as used in the
plan shall include any successor to the company by reason of merger,
consolidation, the purchase of all or substantially all of the company's assets
or otherwise.
ARTICLE 4
Amendment and Termination
While the company expects to continue the plan, it must necessarily
reserve and hereby does reserve the right to amend the plan from time to time
or to terminate the plan at any time; provided that no amendment of the plan,
nor the termination of the plan may cause the reduction or cessation of any
benefits that were accrued as of the date of such amendment or termination and
otherwise would be payable under this plan, but for such amendment or
termination.
-5-
<PAGE> 6
IN WITNESS WHEREOF, this plan has been executed on behalf of the company
by its duly authorized officers as of the day and year first above written.
GAYLORD CONTAINER CORPORATION
By: _________________________________
Its:_____________________________
ATTEST:
By: _________________________________
Its:_____________________________
-6-
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 3 to
Registration Statement No. 333-30423 of Gaylord Container Corporation on Form
S-4 of our report dated November 4, 1996, included in the Annual Report on Form
10-K of Gaylord Container Corporation, and to the use of our report dated
November 4, 1996, appearing in the Prospectus, which is part of this
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Chicago, Illinois
September 8, 1997
